Research Explained

You will discover key economic theories and concepts backed by the latest research, presented clearly, and connected to major economic topics.

Public Choice Theory: voters rationally ignorant, politicians vote‑maximizers, bureaucrats budget‑maximizers, rent‑seeking, logrolling, interest groups, pork‑barrel.

Research Explained

Public Choice Theory: How Economists Study Politics and Why Politicians Don’t Always Serve the Public Interest

Public Choice Theory applies economic reasoning to politics, showing that self‑interest shapes politicians, bureaucrats, and voters, leading to rent‑seeking, rational...

March 24, 2026

Prospect Theory: loss aversion 2.25 times, reference dependence, diminishing sensitivity, S‑shaped value function, overweight small probabilities, certainty effect.

Research Explained

Prospect Theory: How Kahneman & Tversky Changed Economics

Prospect theory explains how people actually make decisions under risk: they are loss‑averse, overweight small probabilities, and evaluate outcomes relative...

March 24, 2026

Purchasing Power Parity: absolute PPP with Big Mac Index, relative PPP with Pakistan rupee depreciation, and law of one price.

Research Explained

Purchasing Power Parity: The Theory Behind Exchange Rate Movements

Purchasing power parity (PPP) states that exchange rates should equalize national price levels in the long run. Despite short‑run deviations,...

March 24, 2026

Nash Equilibrium: payoff matrix with (N,N) as stable outcome; no unilateral gain; each player's strategy is best response to others.

Research Explained

The Nash Equilibrium: Understanding Strategic Behaviour in Economics

The Nash equilibrium defines a set of strategies where no player can gain by unilaterally changing their choice. It is...

March 23, 2026

Akerlof Market for Lemons: information asymmetry leads to adverse selection; good cars withdraw, markets collapse; solutions include warranties, reputation, and education as a signal.

Research Explained

The Akerlof Model (Market for Lemons): How Information Asymmetry Breaks Markets

Akerlof’s “Market for Lemons” shows how information asymmetry can drive quality products from a market, causing adverse selection and potential...

March 22, 2026

Efficient Market Hypothesis: random walk means prices unpredictable; over 20 years, most active funds underperform passive index funds after fees.

Research Explained

The Efficient Market Hypothesis: Can You Beat the Stock Market?

The Efficient Market Hypothesis asserts that stock prices fully reflect all available information, making consistent outperformance impossible. Despite anomalies and...

March 22, 2026

Gravity Model: trade flows are proportional to GDP product and inversely proportional to distance; large economies with short distance have high trade.

Research Explained

The Gravity Model of Trade: Predicting Bilateral Trade Flows (And Why It Still Rules)

The gravity model of trade predicts bilateral flows based on economic size and distance. Rooted in Newtonian physics and now...

March 22, 2026

Modigliani‑Miller Theorem: Proposition I shows irrelevance, Proposition II shows cost of equity rises with leverage, tax shield adds value, and frictions create optimal capital structure.

Research Explained

The Modigliani-Miller Theorem: Capital Structure Irrelevance (And Why It Still Surprises)

The Modigliani-Miller theorem shows that under perfect markets, capital structure does not affect firm value. Real-world frictions like taxes and...

March 22, 2026

Keynesian Cross: government spending multiplies; with MPC 0.6, multiplier is 2.5, generating Rs 250 crore from Rs 100 crore initial spend.

Research Explained

The Keynesian Cross: The Birth of Fiscal Multiplier Analysis (And Why It Still Shapes Policy)

The Keynesian cross shows how government spending multiplies into larger output increases through the marginal propensity to consume, shaping fiscal...

March 21, 2026

Linder Hypothesis: similar incomes and overlapping demand drive trade in similar goods between Germany‑Japan and Pakistan‑India.

Research Explained

The Linder Hypothesis: Why Similar Countries Trade Similar Goods

Overlapping demand, not factor endowments, drives trade between similar economies. The Linder hypothesis explains why countries with comparable per capita...

March 21, 2026