1. Leontief Paradox
The finding of Wassily W. Leontief regarding the invalidity of the Heckscher–Ohlin theory is widely known as Leontief Paradox. The HO theory of international trade argues that if a country has a lot of labor compared to capital, price of labor is comparatively lower than other countries with less labor. Thus it specializes in exporting labor intensive products. On the same line, a capital abundant country specializes in exporting capital intensive products.
However, an empirical investigation of Leontief carried out in 1953 revealed that the US—the most capital abundant country in the
world exported labor-intensive commodities and imported
capital- intensive commodities. His study showed that US imports were 30% more capital-intensive than US
exports. This finding, which is contrary to the HO theory that a capital intensive country specializes in exporting capital intensive products, is known as Leontief Paradox.
2. Laffer Curve
Laffer curve is a graphical illustration of the relationship between tax rate and the resultant government revenue. It is used to infer about the highrest rate of tx that can be imposed to maximize revenue.It can be illustrated with the following graph.
As shown in graph, as the tax rate is increased initially, tax revenue goes up. But tax revenue can not beincreased indefinitely this way. After the optimum level of tax rate is reached, any increase in tax rate further is counter productive as it discourages the income earners to work more.
Though, the idea of Laffer curve seems lucrative, the tax rate that maximizes tax collection cannot be observed and there is unanimity in what should be such rate. Estimates of such rate vary widely averaging somewhere around 70 percent.
3. Kuznet's Curve
Kuznets curve argues that as an economy develops, income inequality first worsens and then improves at later stages of development. Kuznets believed that
inequality would follow an inverted “U” shape as it rises and then falls again
with the increase of income per-capita. It can be graphically shown in the figure below.
In the initial stages of development, when the economy starts industrializing, it the rcish people who have money benefits more. The income of the wage earners rises at a slower rate. As a result, income inequality increases initially. After the country reaches a certain high level of income per capita, the benefits of growth are distributed equally to some extent as the economy is driven by the concept of welfare state. This leads to a fall in inequality.
4. Fisher Equation
Fisher equation shows the relationship between real interest rate, nominal interest rate and inflation. According to this equation, the nominal interest rate is approximately equal to the real interest rate plus inflation. It can be expressed as :
Where
r denote the real interest rate,
i denote the nominal interest rate, and let
π denote the inflation rate.
5. Dutch Disease
Dutch disease is the apparent loss in other sectors of the economy mainly because of the rapid growth of one sector. It was originally related to the use of natural resources and the resultant loss of competitiveness from higher export earnings. When one of the sectors of the economy grows rapidly, it attracts a lot of foreign investment and earns a lot foreign exchange. Building up of foreign reserves either through foreign investment or export earnings ultimately leads to an appreciation of domestic currency and loss of competitiveness. Such a loss reduces exports of other sectors and dampens their growth.
Now, a natural question is whether remittance flows in Nepal has created any such symptoms?
On the surface, remittance flows in Nepal has nothing to do directly with the exchange rate as the exchange rate is pegged with India and any changes in the exchange rate with other currencies comes from the changes in exchange rate of Indian currency with the US dollar.
However, competitiveness is not realistically measured by the nominal exchange rate changes. It is more related with the real exchange rate. If domestic inflation in Nepal is higher than that of other countries (which is naturally the case), even if the nominal rate if fixed, Nepali currency appreciates in real sense. It is in this sense, remittance flows have helped increase demand and create inflationary pressure to some extent and created symptoms of Dutch disease to some extent.
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