Transcript Econ 2101 Macroeconomic Theory

Economics 1002
Introduction to
Macroeconomics
Dr. Victor Li
Spring 2006
Class Organization
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Textbook
Grading/Exams
Office Hours
Prerequisites
Course Outline/Reading List
Structure of Course
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Economic Thinking and Fundamentals
Macroeconomic Institutions and Terminology
How (macro) economy works.
Applications to Economic Policy and Current
Events.
What is Economics?
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Economics is NOT about how to make lots of
money or playing the stock market.
Economics is NOT even how to forecast the
future.
Economics is a way of thinking about how the
world works. It is a study of how society makes
choices in allocating (dividing up) scarce
resources.
Economics is a social science which attempts to
identify the “rules” that describe economic
behavior.
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Examples:
Allocation of time, human
capital, tax revenues.
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“Economics is the study of how an ordinary
man goes about his daily life.” – Alfred
Marshall
Scarcity  Choices  Consequences
Why Study Economics?
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It provides a powerful way of thinking about
how the world works and understanding the
business, political, and social events of our
time.
- College tuition and financial aid.
- Jobs and salaries upon graduation.
- Presidential elections.
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Understanding/advising public policies.
Avoid being “fooled by economists and confused by
politicians”
What do Econ majors do? Blend of quantitative
skills and social science opens up many career
opportunities:
- pre business, pre-law, pre-med
- consulting firms, investment & commercial
banking, insurance.
- the ivory tower
- consulting and highest levels of government:
Ben Bernanke (Princeton) - Next Federal Reserve
Chairman
Alan Blinder (Princeton) Former Vice Chair of
FED
Stanley Fischer (MIT) Director of World Bank
Larry Summers (Harvard) Sec. of Treasury
(Clinton)
Glen Hubbard (Columbia) and Gregory Mankiw
(Harvard) – Economic Advisors to G.W. Bush.
What Do Most Economists Believe?
(1) Consequences of Choices Using
Cost/Benefit Analysis
(2) Look at the BIG picture!
(3) Self-Interest is a Useful Principal in
Understanding How Society Works
(4) Incentives Matter
(5) Opportunity Costs
(6) Demand and Supply: Markets are Powerful
Forces.
(7) Benefits of Exchange and Specialization
(8) Things Add up
Divisions in Economics
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Microeconomics - the study of how a
individual person, firm, market, or group of
markets functions.
Macroeconomics - the study of the entire
economy. Deals with “aggregate” economic
factors such as national output (GDP),
inflation, unemployment, interest rates,
deficits.
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Econometrics - Applied statistics that is used
to test micro and macro economic theories
and attempts to construct forecasting models.
Market Economics and Adam Smith
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“No one person in the world can make a #2
pencil!”
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Cut the timber from Pacific NW
Mine the graphite from South Africa
Harvest rubber in Malaysia
Mix paint in Delaware
What ensures that there is enough pencils,
paper, gasoline, food?
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ANSWER: The MARKET!
Adam Smith (1723-1790) first suggested that
a complex market system with no one in
charge would work to coordinate all economic
activity. This idea became known as
Capitalism.
- Traditionalism
- Centralized Planning
- Capitalism and Free Markets
Some socially condemned behavior, such as
greed, can benefit society (“The Wealth of
Nations”)
- self interest => efficiency
- Resources flow to where they are most
valued and needed
 The “invisible hand”
 Wouldn’t greedy capitalists exploit consumers
and charge incredibly high prices?
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Role of Economic Theory and Policy
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An economic theory or model is a greatly
simplified version of the actual working
economy (an “abstraction”) so that the
relationship between economic variables may
be singled out and analyzed.
Statistical correlation does not imply
causation
The right degree of abstraction depends on
the objectives of the analysis.
Two Purposes of Economic Theory
(i) Positive Economics
- what the economy is
(ii) Normative Economics
- what the economy ought to be
 Theories need not model all aspects of the
working economy to have useful predictions.
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Economic theories often incorporate rational
decision making:
(i) proper evaluation of consequences and
incentives
(ii) cost-benefit principle
(iii) opportunity costs