By Ms. Deeksha
Assistant Professor
The term paradox is from a Greek word “ paradoxon” that means “ contrary to expectations, exixting belief or perceived opinion”
It is a statement that appears to be self contradictory or silly but may include a latent truth. It is also used to illustrate an opinion or statement contrary to accepted traditional ideas. A paradox is often used to make a reader think over an idea in innovative way.
There are numerous paradoxes in economics. Some of them are:
- Giffen paradox
The demand curve of any commodity is generally downward sloping, but Giffen’s Paradox suggests that under certain situations Giffen goods have an upward sloping demand curve.
In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. Giffen goods are named after Scottish economist Sir Robert Giffen who first proposed the paradox from his observations of the purchasing habits of the Victorian era poor.
- Paradox of Thrift
The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals’ attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy. If a population decides to save more money at all income levels, then total revenues for companies will decline. This decreased demand causes a contraction of output, giving employers and employees lower income. Eventually the population’s total saving will have remained the same or even declined because of lower incomes and a weaker economy.
- Paradox of value (diamond–water paradox)
The paradox of value (also known as the diamond–water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.
The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use;” the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.”
- Leontief Paradox
Leontief’s paradox was an attempt to test the theory proposed by Heckscher-Ohlin which states that each country exports the commodity which intensively uses its abundant factor and import Leontief found that the United States trade policy contradicts Heckscher-Ohlin theory. The first empirical test of the HO theory was conducted in 1953 which concluded that the most capital abundant country in the world by any criterion exported labour intensive commodities and imported capital intensive commodities.
- Gibson’s Paradox
Gibson’s Paradox, named after the British economist Alfred Herbert Gibson states that the rate of interest and the general level of prices are positively correlated.
It was believed to be a paradox because most economic theorists predicted that the correlation would be negative. The Quantity Theory of Money predicts that a slower money-growth creates slower price-rise. In addition, slower money-growth means slower growth of loanable funds and thus raises interest rates. If both these premises are true, slower money-growth should mean lower prices and higher interest rates. However, Gibson observed that lower prices were accompanied by a drop—rather than a rise—in interest rates.
Ms. Deeksha
Assistant Professor
