Limitation of Managerial Economics

Topics: Inflation, Quantity theory of money, Economics Pages: 2 (691 words) Published: August 20, 2010
conomists are a paragon of virtue, rationality and common sense amidst a sea of ignorance, superstition and irrationality. They are probably right, but, sometimes it is good to state a case in strong terms, to make people think. However, I feel there is a need to redress the balance and point out the many mistakes and limitations of Economics which are stated below. Economics is difficult

John Maynard Keynes said economics is very difficult and many people underestimate how difficult it is. In Maths 2+2 always equals 4, but in economics it usually depends on countless variables almost too difficult to take into account. To give one example, the link between the Money supply and inflation. The quantity theory of money MV=PY or MONEY TIMES VELOCITY EQUALS THE PRICE LEVEL TIMES OUTPUT. This equation can be used to define a link between money growth and inflation that depends on the evolution of money. Velocity of money suggests there is a correlation between the money supply and inflation. (As most non economists would tell you - if you print money you will cause inflation). But, in practise the growth of the money supply is influenced by so many variables such as technological change, velocity of circulation and consumer behaviour that M3 growth statistics became almost meaningless. - MV=PY is great in theory but in practise it is difficult to make anything out of it. Forecasting the Future

It is difficult to forecast the future; yet in economic policy making, it becomes important. Go back to May 2007 and how many economists were predicting a fall in UK house prices of 25% and the deepest recession since the war? I wasn't and certainly not one of the treasury economists, who were predicting stable growth of 2% and a reduction in the government's borrowing. Of course, there were people predicting a house price collapse and they have been proved right. (Though some of them started predicting a house price collapse back in 2000.)

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