Background
The concept of a numeraire is fundamental in economic theory, serving as a benchmark against which prices of other goods and services are measured. This abstraction simplifies the complex web of prices in the economy by providing a single reference point.
Historical Context
The idea of using a numeraire is drawn from early economic thought, with roots in classical economics. Famous economists like Léon Walras and Alfred Marshall utilized this concept to simplify the analysis of market equilibrium. Historically, commodities like gold have often served as numeraire due to their universal acceptance and intrinsic value.
Definitions and Concepts
A numeraire is essentially an economic tool used as a base measure of value in an economy. It is defined to have a price of one, thus simplifying the complexity of multiple exchange ratios into a single problem. Mathematically, if the price of the numeraire is set to one, the prices of other goods are expressed in terms of this standard.
Major Analytical Frameworks
Classical Economics
In classical economics, commodities like gold were often used as the numeraire since they represented stable and widely accepted measures of value.
Neoclassical Economics
In neoclassical models, the choice of numeraire is arbitrary but serves to normalize utility functions and budget constraints, making theoretical analysis more tractable.
Keynesian Economic
Although not a central focus, Keynesian economics acknowledges the role of a numeraire in macroeconomic models, particularly when discussing real versus nominal values.
Marxian Economics
Marxian economics largely views price in terms of labor theory value but also uses commodities as a measure of value, aligning conceptually with the idea of a numeraire.
Institutional Economics
Institutional economics considers the role of social and economic institutions in establishing numeraires, reflecting deeper societal choices and norms.
Behavioral Economics
Behavioral economics analyzes how people perceive value and may touch upon numeraires when discussing units of account or references points in decision-making.
Post-Keynesian Economics
Post-Keynesian economics might critique the reliance on numeraires, emphasizing the dynamics of money and credit over static value measures.
Austrian Economics
Austrian economists focus on subjective value, often questioning the utility of a single numeraire while acknowledging its practical usage in price systems.
Development Economics
In development economics, numeraire is crucial when assessing the relative cost of living and poverty lines across different economies.
Monetarism
Monetarists use the numeraire when analyzing the money supply’s effect on general price levels, specifically in terms of finding a stable base measure of value.
Comparative Analysis
The numeraire can be any good with a positive equilibrium price, making it versatile yet dependent mainly on market contexts. Commodities, fiat currencies, or even utility measures can serve this function depending on the economic analysis context. The choice of numeraire can influence interpretative outcomes, especially when comparing goods, services, and even international currencies.
Case Studies
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Gold Standard Era: During the gold standard, gold served as a numeraire, simplifying international trade and economic stability analysis.
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Modern Currency Systems: In modern economies, major currencies (such as the US Dollar) often serve as a de facto numeraire in global trade, influencing international price stability and economic policies.
Suggested Books for Further Studies
- “Value and Capital” by John Hicks
- “General Competitive Analysis” by Kenneth Arrow and Frank Hahn
- “Lectures on Microeconomic Theory” by Edmond Malinvaud
- “Microeconomic Theory: A Mathematical Approach” by James M. Henderson and Richard E. Quandt
Related Terms with Definitions
- Standard of Value: A constant measure used to compare the relative worth of different goods and services.
- Exchange Rate: The value of one currency expressed in terms of another currency.
- Fiat Currency: Currency without intrinsic value, established as money by government regulation.
- Commodity Money: Money whose value comes from a commodity out of which it is made.
- Purchasing Power: The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
