# Syllabus of Economics/Learning bricks

 Another brick in the wall Features of Adam Smith's Definition of Economics Study of Material Goods Only - This definition of Economics only focusses on goods like pen and paper not sunshine and rainbows. Study of Wealth - In Adam Smith's view, Economics is only about wealth - ie. how we can increase wealth Economic Man - An economic man is a person only motivated by self-interest. Causes of Wealth Features of Alfred Marshal's Definition of Economics Study of Mankind - Unlike the wealth definition, this is focussed on man and material welfare Study of Ordinary Business of Life - Economic Activities have been described as the 'ordinary business of life'

### Net Present Value

A net present value calculation seeks to estimate the total real value of a decision in terms of today's monetary unit, given costs and benefits that might be accrued in the future, and some discount rate that the decision maker uses to evaluate future benefits. A discount rate is an estimate of how much less the decision maker values the same benefit one time unit later. Often, the time unit is years, and the discount rate is an annual discount rate. Net present value is then a summation of the value of all benefits accrued over a period of time by a certain decision, where each benefit ${\displaystyle R_{t}}$  at time ${\displaystyle t}$  is discounted by the discount rate, often labeled ${\displaystyle i}$  or ${\displaystyle r}$ .

The Net Present Value (${\displaystyle NPV}$ ) is then

${\displaystyle NPV=\sum \limits _{t=0}^{T}{\frac {R_{t}}{(1+i)^{t}}}}$

where ${\displaystyle T}$  is the total number of future periods, and ${\displaystyle R_{t}}$  is the net benefit in time period ${\displaystyle t}$ , with ${\displaystyle t=0}$  corresponding to the current time period.

### Game Theory

#### Nash Equilibrium

Example of Counterterrorism

In a political economy, policies towards counterterrorism play a major role in the deterrence of terrorists. Such actions display key components represented in game theory. There are two types of policies: proactive and defensive. Proactive policies are utilized as an offensive strategy attacking terrorists, their supporters and their resource base. Defensive policies use a passive approach to create a barrier surrounding potential targets. Game theory assists in explaining the payoffs of both methods in the international community[1].

 EU Deter Status Quo Preempt US Deter -2,-2 2,-4 6,-6 Status Quo -4,2 0,0 4,-2 Preempt -6,6 -2,4 2,2

Figure 1. Deterrence versus preemption - symmetric cases

 EU Deter Status Quo Preempt US Deter -2,-2 2,-4 6,-6 Status Quo -4,2 0,0 4,-2 Preempt -2,6 2,4 6,2

Figure 2. Deterrence versus preemption - asymmetric cases

The Nash equilibrium in Figure 1 is either both countries deter or both countries keep the status quo. If one player chooses an option in which a larger payoff occurs, then the other player will suffer a significant loss. Choices occur simultaneously in symmetric cases. Figure 2 shows an asymmetric case in which the payoff for certain strategies benefit one player significantly more than the other. The Nash equilibrium would occur if both players deter or if one preempts and the other deters.

Such games provide a visual example as to why preferred-target countries choose a combination of offensive and defensive counterterrorism measures, while less-targeted countries resort to defensive measures.

1. Enders, W., & Sandler, T. (2011). The Political Economy of Terrorism. Cambridge: Cambridge University Press. doi:10.1017/CBO9780511791451.