NAZIV RADA:

ECONOMICS

I. INTRODUCTION

Economics is a social science concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: Psychology and ethics try to explain how objectives are formed history records changes in human objectives sociology interprets human behavior in social contexts. !tandard economics can be divided into two major fields. "he first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. #icroeconomics assumes that people behave rationally. $onsumers try to spend their income in ways that give them as much pleasure as possible. %s economists say, they maximi&e utility. 'or their part, entrepreneurs seek as much profit as they can extract from their operations. "he second field, macroeconomics, deals with modern explanations of national income and employment. #acroeconomics dates from the book, The General Theory of Employment, Interest, and Money ()*+,-, by the .ritish economist /ohn #aynard 0eynes. 1is explanation of prosperity and depression centers on the total or aggregate demand for goods and services by consumers, business investors, and governments. .ecause, according to 0eynes, inade2uate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending and conse2uently larger budget deficits by government.

II. HISTORY OF ECONOMIC THOUGHT

Economic issues have occupied people3s minds throughout the ages. %ristotle and Plato in ancient 4reece wrote about problems of wealth, property, and trade. .oth were prejudiced against commerce, feeling that to live by trade was undesirable. "he 5omans borrowed their economic ideas from the 4reeks and showed the same contempt for trade. 6uring the #iddle %ges the economic ideas of the 5oman $atholic church were expressed in the canon law, which condemned usury (the taking of interest for money loaned- and regarded commerce as inferior to agriculture. Economics as a subject of modern study, distinguishable from moral philosophy and politics, dates from the work, Inquiry into the Nature and Causes of the Wealth of Nations ()778-, by the !cottish philosopher and economist %dam !mith. #ercantilism and physiocracy were precursors of the classical economics of !mith and his )*th9century successors. II.1. Mercanti i!" "he development of modern nationalism during the )8th century shifted attention to the problem of increasing the wealth and power of the various nation9states. "he economic policy of the leaders of that time, known as mercantilism, sought to encourage national self9sufficiency. "he heyday of the mercantilist school in England and :estern Europe occurred during the )8th through the early );th centuries. #ercantilists valued gold and silver as an index of national power. :ithout the gold and silver mines in the <ew :orld from which !pain drew its riches, a nation could accumulate these precious metals only by selling more merchandise to foreigners than it bought from them. "his favorable balance of trade necessarily compelled foreigners to cover their deficits by shipping gold and silver. #ercantilists took for granted that their own country was either at war with its neighbors, recovering from a recent conflict, or getting ready to plunge into a new war. :ith gold and silver, a ruler could hire mercenaries to fight, a practice followed by 0ing 4eorge === of the >nited 0ingdom of 4reat .ritain when he used 1essian troops during the %merican 5evolution.

%s needed, the monarch could also buy weapons, uniforms, and food to supply the soldiers and sailors. #ercantilist preoccupation with precious metals also inspired several domestic policies. =t was vital for a nation to keep wages low and the population large and growing. % large, ill9paid population produced more goods to be sold at low prices to foreigners. Ordinary men and women were encouraged to work hard and avoid such extravagances as tea, gin, ribbons, ruffles, and silks. =t also followed that the earlier that children began to work, the better it was for their country3s prosperity. One mercantilist writer had a plan for children of the poor: @:hen these children are four years old, they shall be sent to the county workhouse and there taught to read two hours a day and be kept fully employed the rest of the time in any of the manufactures of the house which best suits their age, strength, and capacity.A II.#. $!%!i&crac% Physiocracy was briefly in vogue in 'rance during the second half of the );th century as a reaction against the narrow and restrictive policies of mercantilism. "he founder of the school, 'ranBois Cuesnay, was a physician at the royal court of 0ing Douis EF. 1is major work, the Tableau conomique, an attempt to trace income flows through the economy, crudely anticipated ?Gth9century national income accounting. %ll wealth, in the doctrine of the physiocrats, originates in agriculture through trade, wealth is distributed from farmers to other groups. "he physiocrats were partisans of free trade and laisse&9faire. "hey maintained that the revenue of the state should be raised by a single direct tax levied on the land. %dam !mith met the leading physiocrats and wrote 9 for the most part, favorably 9 of their doctrines. II.'. T(e C a!!ica Sc(&& %s a coherent economic theory, classical economics starts with !mith, continues with the .ritish economists "homas 5obert #althus and 6avid 5icardo, and culminates in the synthesis of /ohn !tuart #ill, who as a young man was a follower of 5icardo.

%lthough differences of opinion were numerous among the classical economists in the three9 2uarters of a century between !mith3s Wealth of Nations and #ill3s Principles of Political Economy ();H;-, members of the group agreed on major principles. %ll believed in private property, free markets, and, in #ill3s words, that @only through the principle of competition has political economy any pretension to the character of a science.A "hey shared !mith3s strong suspicion of government and his ardent confidence in the power of self9interest represented by his famous @invisible hand,A which reconciled public benefit with individual pursuit of private gain. 'rom 5icardo, classicists derived the notion of diminishing returns, which held that as more labor and capital were applied to land, yields after @a certain and not very advanced stage in the progress of agriculture steadily diminished.A "hrough !mith3s emphasis on consumption, rather than on production, the scope of economics was considerably broadened. !mith was optimistic about the chances of improving general standards of life. 1e called attention to the importance of permitting individuals to follow their self9interest as a means of promoting national prosperity. #althus, on the other hand, in his enormously influential book n Essay on the Principle of

Population ()7*;-, imparted a tone of gloom to classical economics, arguing that hopes for prosperity were fated to founder on the rock of excessive population growth. 'ood, he believed, would increase in arithmetic ratio (?9H989;9)G and so on-, but population tended to double in each generation (?9H9;9)89+? and so on- unless that doubling was checked either by nature or human prudence. %ccording to #althus, nature3s check was @positiveA: @"he power of population is so superior to the power of the earth to produce subsistence for man that premature death must in some shape or other visit the human race.A "he shapes it took included war, epidemics, pestilence and plague, human vices, and famine, all combining to level the world3s population with the world3s food supply. "he only escape from population pressure and the horrors of the positive check was in voluntary limitation of population, not by contraception, rejected on religious grounds by #althus, but by late marriage and, conse2uently, smaller families. "hese pessimistic doctrines of classical economists earned for economics the epithet of the @dismal science.A

#ill3s Principles of Political Economy was the leading text on the subject until the end of the )*th century. %lthough #ill accepted the major theories of his classical predecessors, he held out more hope than did 5icardo and #althus that the working class could be educated into rational limitation of their own numbers. #ill was also a reformer who was 2uite willing to tax inheritances heavily and even to allow government a larger role in protecting children and workers. 1e was far more critical than other classical economists of business behavior and favored worker ownership of factories. #ill thus represents a bridge between classical laisse&9 faire economics and an emerging welfare state. "he classical economists also accepted !ay3s Daw of #arkets, the doctrine of the 'rench economist /ean .aptiste !ay. !ay3s law holds that the danger of general unemployment or @glutA in a competitive economy is negligible because supply tends to create its own matching demand up to the limit of human labor and the natural resources available for production. Each enlargement of output adds to the wages and other incomes that constitute the funds needed to purchase added output. II.). Mar*i!" Opposition to the classical school of economics came first from early socialist writers such as the 'rench social philosopher the $omte de !aint9!imon and the .ritish reformer 5obert Owen. =t was 0arl #arx, however, who provided the most important social theories. "o the classical vision of capitalism, #arxism was in large measure a sharp rebuttal, but to some extent it embodied variations of classical themes. #arx adopted, for example, a version of 5icardo3s labor theory of value. :ith a few 2ualifications, 5icardo had explained prices as the result of the different 2uantities of human labor needed to produce different finished products. %ccordingly, if a shirt is priced at I)? and a pair of socks at I?, it is because six times as many hours of human labor entered into the making of the shirt as the socks.

'or 5icardo, this theory of value was an analytical convenience, a way of making sense of the multitude of different prices in shops. 'or #arx, the labor theory was a clue to the inner workings of capitalism, the master key to the ine2uities and exploitation of an unjust system. %n exile from 4ermany, #arx spent most of his mature years in Dondon, supported by his friend and collaborator, the 4erman revolutionist 'riedrich Engels, and by the proceeds from occasional contributions to newspapers. 1e conducted his extensive research in the reading room of the .ritish #useum. #arx3s historical studies convinced him that profit and other property income are the proceeds from force and fraud inflicted by the strong on the weak. @Primitive accumulationA in English economic history was epitomi&ed by the record of land enclosure. =n the )7th and );th centuries, landowners used their control of Parliament to rob their tenants of traditional rights to common lands. "aking these lands for their own use, they drove their victims reluctantly into cities and factories. 6eprived both of tools and land, .ritish men, women, and children had to work for wages. "hus, #arx3s central conflict was between so9called capitalists who owned the means of production J factories, machines and workers or proletarians who possessed nothing but their bare hands. Exploitation, the heart of #arxist doctrine, is measured by the capacity of capitalists to pay no more than subsistence wages to their employees and extract for themselves as profit (or surplus value- the difference between these wages and the selling price of market commodities. %lthough in the Communist Manifesto ();H;- #arx and Engels paid grudging tribute to the material achievements of capitalism, they were convinced that these were transitory and that the internal contradictions within capitalism would as surely terminate its existence as earlier in history feudalism had faltered and disappeared. On this point #arx wrote not in the tradition of English classical economics but rather out of his training in the metaphysics of the 4erman philosopher 4eorg :ilhelm 'riedrich 1egel. 1egel interpreted the movement of human history and thought as a progression of triads: thesis, antithesis, and synthesis. 'or example, a thesis might be a set of economic arrangements such as feudalism or capitalism.

=ts opposite or antithesis was, say, socialism as opposed to capitalism. "he clash between thesis and antithesis evolved into the higher stage of synthesis 9 in this case communism, which unites capitalist technology with social public ownership of factories and farms. =n the long run, #arx believed that capitalism was certain to falter because its tendency to concentrate income and wealth in ever fewer hands created more and more severe crises of excess output and rising unemployment. 'or #arx, capitalism3s fatal contradiction was between improving technological efficiency and the lack of purchasing power to buy what was produced in ever larger 2uantities. %ccording to #arx, the crises of capitalism were certain to manifest themselves in falling rates of profit, mounting hostility between workers and employers, and ever more severe depressions. "he outcome of class warfare was fated to be revolution and progress toward, first, socialism and ultimately communism. =n the first stage a strong state would still be re2uired in order to eliminate the remnants of capitalist opposition. Each person3s work would be rewarded according to the value of his or her contribution. Once communism was achieved, the state, whose central purpose was class domination, would wither away, and each individual would in the utopian future be compensated according to need. II.+. T(e Ne&c a!!ici!t! $lassical economics proceeded from the assumption of scarcity, such as the law of diminishing returns and #althusian population doctrine. 6ating from the );7Gs, neoclassicist economists such as :illiam !tanley /evons in .ritain, DKon :alras in 'rance, and 0arl #enger in %ustria shifted emphasis from limitations on supply to interpretations of consumer choice in psychological terms. $oncentrating on the utility or satisfaction rendered by the last or marginal unit purchased, neoclassicists explained market prices not by reference to the differing 2uantities of human labor needed to produce assorted items, as in the theories of 5icardo and #arx, but rather according to the intensity of consumer preference for one more unit of any given commodity.

"he .ritish economist %lfred #arshall, particularly in his masterly neoclassicist work Principles of Economics ();*G-, explained demand by the principle of marginal utility, and supply by the rule of marginal productivity (the cost of producing the last item of a given 2uantity-. =n competitive markets, consumer preferences for low prices of goods and seller preferences for high prices were adjusted to some mutually agreeable level. %t any actual price, then, buyers were willing to purchase precisely the 2uantity of goods that sellers were prepared to offer. %s in markets for consumer goods, this same reconciliation between supply and demand occurred in markets for money and human labor. =n money markets, the interest rate matched borrowers with lenders. "he borrowers expected to use their loans to earn profits larger than the interest they had to pay. !avers, for their part, demanded a price for postponing the enjoyment of their own money. % similar accommodation had to be made in wages paid for human labor. =n competitive labor markets, wages actually paid represented at least the value to the employer of the output attributed to hours worked and at least acceptable compensation to the employee for the tedium and fatigue of the work. .y implication, if not direct statement, the tendency of neoclassical doctrine has been politically conservative. =ts advocates distinctly prefer competitive markets to government intervention and, at least until the 4reat 6epression of the )*+Gs, insisted that the best public policies were echoes of %dam !mith: low taxes, thrift in public spending, and annually balanced budgets. <eoclassicists do not in2uire into the origins of wealth. "hey explain disparities in income as well as wealth for the most part by parallel differences among human beings in talent, intelligence, energy, and ambition. 1ence, men and women succeed or fail because of their individual attributes, not because they are either beneficiaries of special advantage or victims of special handicaps. =n capitalist societies, neoclassical economics is the generally accepted textbook explanation of price and income determination. II.,. -e%ne!ian Ec&n&"ic! /ohn #aynard 0eynes was a student of %lfred #arshall and an exponent of neoclassical economics until the )*+Gs. "he 4reat 6epression bewildered economists and politicians alike.

"he economists continued to hold, against mounting evidence to the contrary, that time and nature would restore prosperity if government refrained from manipulating the economy. >nfortunately, approved remedies simply did not work. =n the >.!., 'ranklin 6. 5oosevelt3s )*+? landslide presidential victory over 1erbert 1oover attested to the political bankruptcy of laisse&9 faire policies. <ew explanations and fresh policies were urgently re2uired this was precisely what 0eynes supplied. =n his enduring work The General Theory of Employment, Interest, and Money, the central message translates into two powerful propositions. ()- Existing explanations of unemployment he declared to be nonsense: <either high prices nor high wages could explain persistent depression and mass unemployment. (?- =nstead, he proposed an alternative explanation of these phenomena focused on what he termed aggregate demand 9 that is, the total spending of consumers, business investors, and governmental bodies. :hen aggregate demand is low, he theori&ed, sales and jobs suffer when it is high, all is well and prosperous. 'rom these generalities flowed a powerful and comprehensive view of economic behavior 9 the basis of contemporary macroeconomics. .ecause consumers were limited in the amounts that they could spend by the si&e of their incomes, they could not be the source of the ups and downs of the business cycle. =t followed that the dynamic forces were business investors and governments. =n a recession or depression, the proper thing to do was either to enlarge private investment or create public substitutes for the shortfalls in private investment. =n mild economic contractions, easy credit and low interest rates (monetary policy- might stimulate business investments and restore aggregate demand to a figure consistent with full employment. #ore severe contractions re2uired the sterner remedy of deliberate budget deficits either in the form of spending on public works or subsidies to afflicted groups. II... Mat(e"atica Ec&n&"ic! .oth neoclassical price theory and 0eynesian income theory have been illustrated by the mathematics of calculus, linear algebra, and other sophisticated techni2ues.

"he most powerful and popular 9 if not necessarily the most successful 9 alliance of economics with mathematics and statistics occurs in the specialty called econometrics. Econometricians are model builders who link together hundreds or even thousands of e2uations that purport to explain the behavior of an entire economy. %s forecasting tools, econometric models generally are used by both corporations and government departments, although their record of accuracy is neither better nor worse than that of alternative ways of looking into the future. Operations research and input9output analysis are two additional specialties in which economic analysis and higher mathematics operate in tandem. Operations research stresses a systems approach to problems. "ypical pu&&les involve coordinating the functions of a multiple9plant corporation, fabricating many products, and using e2uipment so as to minimi&e costs and maximi&e efficiency. 5esearchers make use of the expertise of engineers, economists, industrial psychologists, statisticians, and mathematicians. =n the words of its inventor, the 5ussian %merican economist :assily Deontief, input9output analysis tables @describe the flow of goods and services between all the individual sectors of a national economy over a stated period of time.A %lthough constructing such a table is a challenge, this method has had a major impact on economic thinking. =t is now widely used in socialist as well as capitalist countries.

III. ECONOMIC SYSTEMS

%ll organi&ed communities mix, in various proportions, market activity and government intervention. Private markets themselves differ widely in the degree of competition under which they operate, all the way from single9firm monopolies to the fierce rivalry among hundreds of retailers. #uch the same point applies to government intervention, which ranges from mild and comparatively uncoercive manipulation of tax, credit, contract, and subsidy policies through mandatory controls over wages and prices to the detailed central planning of $ommunist countries. Even those societies most completely committed to central planning, however, grudgingly modify official ideology by some concessions to private enterprise.

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'or example, the >!!5 allowed its farmers, although organi&ed in collective enterprises, to market crops grown on their own small plots. 6uring the $ommunist period in Poland, most farming was in the hands of individual owners. "he former Lugoslavia experimented in worker management of factories during its $ommunist period. !imilar variation exists among capitalist economies. =n most of them, the government owns and operates railroads and airlines. Even where outright government ownership or operation is exceptional, as in /apan, the central government exerts tremendous influence over economic activity. "he >nited !tates, the most devoted of major capitalist economies to free enterprise, has nevertheless rescued faltering corporations such as Dockheed and $hrysler and has, for all practical purposes, converted a number of major defense contractors into federal subsidiaries. #any %merican economists have come to accept the concept of a @mixed economy,A combining private initiative with some government control. '.1. Free Enter/ri!e "he major differences between $ommunist and %merican economic organi&ation concern ownership of factories, farms, and other enterprises, as well as contrasting principles of pricing and income distribution. =n the >.!. two9thirds of the nation3s gross national product (4<P- is directly generated by profit9making business enterprises, farmers, and such voluntary nongovernmental entities as private universities, hospitals, cooperatives, and foundations. Of the remaining one9third of the 4<P, which is generated by the government, more than half represents transfers from taxpayers to old9age pensioners, veterans, welfare recipients, and other groups of beneficiaries. =n recent years in the >.!., the federal government has begun to deregulate industries such as air transportation and thus to diminish its influence over prices and the provision of services. =ndeed, the most important price controlled by public influence is the price of moneyMthat is, the rate of interest.

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%lthough %merican opposition to both controls and national planning is strong, the >.!. government has repeatedly resorted to these measures in times of emergency, such as during :orld :ar == and the 0orean :ar. =n general, however, free9enterprise economies consider state ownership of productive facilities and government interference in price setting as deplorable exceptions to the rule of private ownership and price determination through the mediation of competitive markets. '.#. Centra $ annin0 Precisely the reverse attitude toward economic central planning is the case in $hina and certain other $ommunist countries. %lthough small private enterprises are increasingly being tolerated, and no centrally planned economy has been able to function without some reliance on private ownership of agricultural land, the dominant ideology favors state planning over competitive price setting, and public ownership of factories, farms, and large retail establishments. !trictly speaking, there is no reason why a democratic community could not freely choose to plan production, prices, and the distribution of income and wealth. =n contemporary experience, however, central economic planning has generally run parallel to $ommunist Party control of political life. <onetheless, important differences exist in the strictness of these constraints in different $ommunist countries and even within the same country at different times. =t is also true that capitalism has fre2uently been accompanied by repressive government, as for example in $hile and .ra&il. "he gravest problems of capitalism are unemployment, inflation, and economic injustice. Parallel problems in centrally planned economies include underemployment, rationing, bureaucracy, and scarcity of many consumer items. '.'. 1i2era S&cia i!t! Ec&n&"ie! 'alling somewhere between societies that emphasi&e either central planning or free enterprise are those that practice social democracy or liberal socialism. Examples of social democracy are the !candinavian countries, !weden in particular.

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!weden organi&es the bulk of productive activity under private ownership but regulates this activity closely, intervenes to protect the jobs of workers, and redistributes substantial portions of profits and large individual incomes to low9income groups. On the other hand, the former Lugoslavia from the )*,Gs through the )*;Gs supplied an example of a liberal socialist society. %lthough the $ommunist Party dominated, censorship was mild, emigration was easy, religion was freely exercised, and a uni2ue mixture of state ownership, worker management, and private enterprise combined to operate a comparatively prosperous economy.

IV. CURRENT ECONOMICS $RO31EMS

.etween )*H, and )*7+, the economies of the industriali&ed nations of :estern Europe, /apan, and the >.!. grew fast enough to vastly improve living standards for their residents. % similarly favorable growth was registered by some, but far from all, of the developing or industriali&ing nations, in particular such thriving !outheast %sian economies as "aiwan, 1ong 0ong, !ingapore, and !outh 0orea. $learly several circumstances contributed to this almost uni2ue historical performance. %fter the devastation of :orld :ar ==, a substantial rebuilding boom, combined with lavish flows of aid from the >.!., generated rapid growth in :estern Europe and /apan. %merican multinational corporations invested heavily in the rest of the world. Perhaps most important of all, energy was plentiful and cheap. IV.1. Ener0% $r&2 e"!

.y )*7+, increasing international demand made oil a scarce and valuable commodity. %t that time the Organi&ation of Petroleum Exporting $ountries (OPE$-, which controls the bulk of the world3s oil reserves, sei&ed the opportunity to sharply raise prices. OPE$3s policies dramatically reduced the possibilities of rapid economic growth both in the industriali&ed countries and in those developing nations without oil of their own. Oil, which in the autumn of )*7+ cost I? per barrel, sold in mid9)*;) at nearly ?G times that figure. 'or rich countries, their oil import bill was the e2uivalent of a tremendous annual transfer of claims on their output and wealth to OPE$ suppliers. )+

"hird :orld importers borrowed enormous sums, mostly from major banks in :estern Europe and the >nited !tates. !taggering under the interest payments, poor nations have been compelled to slow the pace of their development plans. %lthough the sharp oil price decline in the mid9 and late )*;Gs greatly benefited consumers in oil9importing nations, it added immensely to the burdens of oil exporters such as #exico, <igeria, Fene&uela, and =ndonesia, as well as the >nited !tates !un .elt. IV.#. In4 ati&n an5 Rece!!i&n

!ome advanced economies, notably /apan and :est 4ermany (now part of the united 'ederal 5epublic of 4ermany-, fared better than others during the )*7Gs and 3;Gs. %ll of them, however, confronted persistent combinations of high inflation, severe unemployment, and sluggish economic growth. OPE$3s transformation of the world energy market increased inflation by raising not only gasoline and home9heating fuel charges but also the prices of all the important manufactures into which petroleum enters, among them chemical fertili&ers, plastics, synthetic fibers, and pharmaceutical products. "hese higher prices reduce purchasing power in much the same manner as would a severe new tax. 5educed purchasing power in turn depresses sales of consumer items, resulting in layoffs of factory and sales personnel. "he entire procedure has a spiraling effect in all sectors of the economy. 'or %mericans, the lower oil prices of the mid9 and late )*;Gs tend to restrain inflation and, like a cut in taxes, leave more income available for other purchases. Experts believe, however, that the crisis is likely to reappear in the )**Gs, particularly if conservation efforts and development of energy alternatives continued to lag. IV.'. T(e R& e &4 G&6ern"ent

"he various economic problems of recent years have stimulated serious debate about the proper role of public policy. Parties on the political left in Europe have advocated more controls and more planning. =n the )*;Gs a different solution was offered by the $onservative Party government of Prime #inister #argaret "hatcher in the >nited 0ingdom and by the 5epublican administration of President 5onald 5eagan in the >.!.

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=n both countries, attempts were made to diminish taxation and government regulation on private enterprise and thus, by enlarging the potential profits of corporations, encourage additional investment, higher productivity, and renewed economic growth. "hese were the central elements of supply9side economics, the guiding doctrine of the two leaders. =mplicit in this government decision to provide businesses with increased incentives to invest, take risks, and work harder were the hopes that technology would reduce the costs of alternatives to oil as an energy source and that the nonenergy sectors of the economy, such as data processing and scientific agriculture, would experience rapid growth as a result of encouragements to invention and innovation. IV.). Un5er5e6e &/e5 Ec&n&"ie!

Poor nations desperately need aid from the rich nations in the form of capital and of technological and organi&ational expertise. "hey also need easy access to the markets of the industriali&ed nations for their manufactures and raw materials. 1owever, the political capacity of rich nations to respond to these needs depends greatly on their own success in coping with inflation, unemployment, and lagging growth rates. =n democratic communities, it is exceedingly difficult to generate public support for assistance to foreign countries when average wage earners are themselves under serious financial pressure. =t is no easier politically to permit cheap foreign merchandise and materials to freely enter %merican and European markets when they are viewed as the cause of unemployment among domestic workers. IV.+. O7t &&8 4&r t(e F7t7re

.y the early )**Gs, the dissolution of the !oviet >nion, coupled with the fall of $ommunist governments in most of Eastern Europe, underlined the trend away from centrally planned economies and toward a freer market system. !eeking to overcome a legacy of inefficiency and mismanagement, the post9$ommunist nations found themselves competing with "hird :orld countries for investment capital and technological assistance.

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Opinions differ as to how long sustained economic growth can continue. Optimists pin their hopes on the ability to improve crop yields and enhance industrial productivity through technological innovation. Pessimists point to diminishing resources, unchecked population growth, excessive military spending, and the reluctance of rich countries to share their wealth and expertise with less fortunate nations. 4overnment instability, endemic corruption, and wide swings in economic policy make the "hird :orld3s economic prospects seem even less auspicious in the )**Gs.

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V. 1ITERATURE

o 4erber, /ames: International Economics %ddison :esley Dongman ?GG).

o 1eilbroner, 5obert N "hurow, Dester: Economics E!plained !imon N !chuster )**;.

o http:OOwww.facsnet.orgOtoolsOref9tutorOecono9termsOglossary.html

o http:OOwww.cepa.newschool.eduOhetOindex.html

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