Political economics was first used to describe the study of production, buying and selling, government relations, and the distribution of national income. It is the intersection of economics and politics. Political economics discusses capitalist, socialist, and mixed economies and how they influence each other. Today, political economics mostly studies political trade offs and their effect on the economy.
The political economy is categorized into three subareas¹:
1. The government’s role or influence in resource allocation for the different economy systems
2. International political economy, which studies the economic impacts of international relations
3. Economic models of political processes
Political economics is often associated with rational-choice assumptions, typically found in game theory and also examines government failure. Political economics branches off into different areas such as new political economics and international political economics. Rational choice theory is a large topic in political economics because it analyzes how humans act to maximize their outcomes and benefit themselves.
Political economics emphasizes quantitative methods such as formal modeling, econometrics and comparative case studies. It focuses on how international and domestic political variables interact with micro and macro economic variables to produce outcomes that apply to globalization, international trade and finance, taxes, and the environment and income distribution.