Economic Theory

Economic theory is about the fundamentals of economics and how they apply to current events. Learning about economic theory may help you better understand the U.S. economy.

Frequently Asked Questions

  • What is an economic theory?

    An economic theory is used to explain and predict the working of an economy to help drive changes to economic policy and behaviors. Economic theories are based on models developed by economists looking to explain recurring patterns and relationships. These theories connect different economic variables to one another to show how they’re related.

  • What is Keynesian economic theory?

    Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. Its main tools are government spending on infrastructure, unemployment benefits, and education. A drawback is that Keynesian policies could increase inflation.

  • What is the economic theory of mercantilism?

    Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a surplus. Mercantilism funds corporate, military, and national growth and advocates trade policies that protect domestic industries.

  • What is the economic theory behind socialism?

    The economic theory behind socialism—an economic system in which citizens share ownership of the various factors of production—is community or solidarity. Socialists believe people should value the freedom and well-being of others as much as their own, and that the economic system should support that goal.

  • What is economic development theory?

    Economic development theory aims to answer the question “why are some countries developed, but others less developed?” It focuses on the financial, social, and economic conditions in developing countries, such as health, education, and employment, to better understand how they could be improved.

  • What was Karl Marx's economic theory?

    Karl Marx’s economic theory critiques capitalism and how it is unjust because there is a struggle between social classes when it comes to labor, production, and economic development. His theory suggests that communism may be a more just economic system.

Key Terms

Illustration of 5 characteristics of a command economy
Command Economy
Wall on Mexico border
Comparative Advantage vs. Competitive Advantage Competitive Advantage: Country, business, or individual provides better value than its competitors Comparative Advantage: Country produces a good or service for a lower opportunity cost than other countries
What Is Comparative Advantage?
Franklin Delano Roosevelt
How FDR Beat the Great Depression
5 traits of a traditional economy: centers around family or tribe, exists in a hunter-gatherer and nomadic society, trade relies heavily on barter, produce only what you need (surplus or leftovers are rare), they eventually evolve to form some form of currency for trade
What Is a Traditional Economy?
Ronald Reagan giving a speech
How President Reagan Ended the 1980s Recession
Various icons, including industrial buildings, a federal building, a container ship and semi-trucks, and a graph showing a falling curve. Text reads: Economies of Scale: An economics term that describes a competitive advantage that large entities have over smaller entities. Manufacturing cost can fall 70% to 90% every time the business doubles its output. Internal economies– the sheer size of the company allowing bulk purchases and external economies – receiving preferential treatment from government or other external sources. Large shipping companies can use ships that carry as many goods as 16 freight trains. Diseconomies of scale can result if a company becomes less efficient.
Economies Of Scale
US delegates attending the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference, in Bretton Woods, New Hampshire
How a 1944 Agreement Created a New International Monetary System
Young African American female coach or speaker makes whiteboard presentation for diverse employees in office
Competitive Advantage
Woman shopping for produce at grocery store
What Are Government Subsidies?
Consumer browsing in a grocery store
Income Effect
A woman uses a laptop while standing in a warehouse full of boxes and other workers
Vertical Integration
keynesian economics vs. classic economics
How Keynesian Economics Works
how mixed economies work
Mixed Economy
Custom illustration showing a ship transporting goods across the Atlantic Ocean. Text says: rooted in colonialism and the use of military force to subdue foreign lands governments used tariffs to protect businesses in certain favored industries, an economic policy popular from the 16th to 18th century that placed an emphasis on exporting goods.
What Is Mercantilism?
President Donald Trump
President Donald Trump's Economic Plans and Policies
Tax cut
What Is the Laffer Curve?
What Is Late Stage Capitalism and Why Is It Trending Today?
shoppers-homeless trickledown
Does Trickle-Down Economics Work?
Supply side economics
Decide for Yourself Whether Supply Side Economics Works.
American flag in front of the One World World trade Center in New York city
Why America Is Not Really a Free-Market Economy
An illustration with the five determinants of demand with examples and formula. "Price of good or service, income of buyers, prices of related goods or services, tastes of consumers, and expectations. Includes the formula qD=f, F = price, income, prices of related goods, tastes, expectations“
5 Determinants of Demand With Examples and Formula
how the law of demand works
Law of Demand
A child holds a globe at home, with North and South America facing the camera
Nobel Prize-winning economist Milton Friedman attends a 1986 Beverly Hills charity dinner in his honor. Duringthe 1980s, Friedman's monetarist policies ruled.
How Milton Friedman's Theory of Monetarism Works
Gas prices are mostly affected by oil prices
How Do Oil Prices Affect Gas Prices?
How to Use Leverage in Investing, Business, and the Economy
Nixon Resigns
How Nixon Destroyed the Dollar
How George Bush Affected the Economy
President Woodrow Wilson
President Woodrow Wilson’s Economic Policies
Two people look at pie charts on a wall
Wage-Push Inflation
Bill Clinton
President Bill Clinton's Economic Policies
JFK’s Economic Accomplishments. JFK at his desk in the Oval Office; an easel chart with a line graph stands in the background. Phrases like “urban spending” and “tax cuts” are written around the line graph. Show this excerpt from his first State of the Union address somewhere: "I will propose within the next 14 days measures aimed at ensuring a prompt recovery and paving the way for increased long-range growth." Continued government spending to end recession and get recovery off to a solid start Increased minimum wage Improved Social Security benefits Passed an urban renewal package
JFK's Impact on the Minimum Wage, Social Security, and Mental Health
President Jimmy Carter
How Carter Created Jobs, Fought Stagflation, and Brokered World Peace
When did the Great Depression start
Why Hoover Couldn't End the Depression With Economic Policies
LBJ in a meeting.
Thank LBJ for Medicare, Civil Rights, Driver's Ed, and Much More.
Barack Obama
Was Bush or Obama Best for the Economy?
Two women working with computer in server room
Does IT Outsourcing Take Away Jobs from Americans?
Differences Between Capitalism and Socialism
What Are the Differences Between Capitalism and Socialism?

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