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Economics 1002 Introduction to Macroeconomics

Economics 1002 Introduction to Macroeconomics. Dr. Victor Li Spring 2006. Class Organization. Textbook Grading/Exams Office Hours Prerequisites Course Outline/Reading List. Structure of Course. Economic Thinking and Fundamentals Macroeconomic Institutions and Terminology

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Economics 1002 Introduction to Macroeconomics

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  1. Economics 1002Introduction to Macroeconomics Dr. Victor Li Spring 2006

  2. Class Organization • Textbook • Grading/Exams • Office Hours • Prerequisites • Course Outline/Reading List

  3. Structure of Course • Economic Thinking and Fundamentals • Macroeconomic Institutions and Terminology • How (macro) economy works. • Applications to Economic Policy and Current Events.

  4. What is Economics? • 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.

  5. Examples: Allocation of time, human capital, tax revenues. • “Economics is the study of how an ordinary man goes about his daily life.” – Alfred Marshall Scarcity  Choices  Consequences

  6. Why Study Economics? • 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.

  7. 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

  8. - 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.

  9. 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

  10. (5) Opportunity Costs (6) Demand and Supply: Markets are Powerful Forces. (7) Benefits of Exchange and Specialization (8) Things Add up

  11. Divisions in Economics • 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.

  12. Econometrics - Applied statistics that is used to test micro and macro economic theories and attempts to construct forecasting models.

  13. Market Economics and Adam Smith • “No one person in the world can make a #2 pencil!” - 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?

  14. 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

  15. 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?

  16. Role of Economic Theory and Policy • 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.

  17. 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.

  18. Economic theories often incorporate rational decision making: (i) proper evaluation of consequences and incentives (ii) cost-benefit principle (iii) opportunity costs

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