Transcript The Language of Macroeconomics

MACROECONOMICS
AND THE GLOBAL BUSINESS ENVIRONMENT
Economics: Economic Review and Macro Basics
2-2
Why Economics?
Economic Question
 Scarcity: limited resources, unlimited wants
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Resources (i.e. factors of production)
 Labor
 Capital
 Entrepreneurial Ability
 Time
 Information
Scarcity=>choices => tradeoffs=>opportunity costs
Opportunity Costs
 Value of whatever you sacrifice in order to do/be
 Value of next best option
 Subjectively valued
Answer to economic question:
Command Economy
vs.
Market Economy
2-3
A Successful Market Economy
 Private property
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create incentives to wisely use resources
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present
future
store fruits of labor/ savings
 Rule of Law
 everyone plays by the same rules
 protects private property
 market system presupposes government
 Price Mechanism
 transmits information
 creates incentives
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orange story
oil story
Ultimately, a rationing device

Can you think of other rationing devices?
2-4
A Successful Market Economy
 Little Information Asymmetry
 Information dominance for one party in transaction
 Can sometimes be corrected by market
 Specialization
 increase productivity
 permits complex, large scale production
 expands field of knowledge
 Voluntary Trade
 only trade if benefits traders
 positive sum game: all parties better off
 trade utilizes unrecognized gains from trade
 tend to trade those goods/services that have the lowest
opportunity costs for us
2-5
A Successful Market Economy
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Comparative Advantage: individuals, firms,
countries with the lowest opportunity costs of
producing a particular good/service should
produce that good and trade for the
goods/service for which they have the highest
opportunity cost
Examples:

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Woodrow Wilson
China-U.S. example
2-6
A Successful Market Economy
 Question: Ellen holds the world record in
speed typing. You expect Ellen
(a) will never hire another person to do her
typing.
(b) is a professional typist.
(c) still might hire someone else to do her typing.
(d) has a comparative advantage in typing.
2-7
Microeconomics vs. Macroeconomics
 Microeconomics: the study of the behavior of
individual economic agents. Microeconomics
asks
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how individuals allocate their time, income,
and wealth among various opportunities for
labor, leisure, consumption, and savings.
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Example: do I work more or less hours given a
pay raise?
how firms decide on output levels, prices, and
the resources that will be used in the
production process
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Example: how sensitive is the demand for
gasoline to price changes?
2-8
Microeconomics vs. Macroeconomics
 Macroeconomics: concerned with overall
economic performance of the nation rather
than individuals or firms
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An analysis of the backdrop of economic
conditions against which firms and consumers
make decisions
Current Issues
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Will the U.S. Federal Reserve continue to
increase interest rates?
What are the consequences of China’s exportdriven growth on other economies?
Why has Europe’s economic growth been so
weak?
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300
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Billions of 1972 Dollars
2-9
Microeconomics vs. Macroeconomics
The U.S. Great Depression
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Linear (1922-1929 Trend)
Real GDP
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Microeconomics vs. Macroeconomics
Current Dollar Value of the Economy
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Argentina ($ billion)
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Argentina
Dominican Republic
Dominican Republic ($ billion)
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Why Study Macroeconomics?
 Importance of Economic Policy Institutions and Issues
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Monetary authority (usually central bank)
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Fiscal Authority
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Controls money supply
Influences interest rates and exchange rates
Controls tax system
Purchases goods and services
Redistributes income
International Policy Makers
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IMF, World Trade Organization, G7
 Significance of Firm-Specific and Aggregate Risk
 Assessment of Long-Run Economic Environment
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How will trade policy, monetary policy, fiscal policy,
technological advancement, political stability affect future
economic growth?
Where will the economy be 10, 20, 30 years from now?