layout: true background-image: url(figs/tcb-logo.png) background-position: bottom right background-attachment: fixed; background-origin: content-box; background-size: 10% --- class: title-slide .row[ .col-7[ .title[ # Principles of Macroeconomics ] .subtitle[ ] .author[ ### Dennis A.V. Dittrich ] .affiliation[ ] ] .col-5[ ] ] --- # What Economics Is .row[.col-7[ > ``Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.'' ] .col-5[ _Lionel Robins, 1932, An Essay on the Nature & Significance of Economic Science_ ] ] .row[.col-7[ * Economics is a social science * There is overlap with psychology, sociology, political science * Economists ask different questions and use different methods to answer their questions * Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanism, social customs, and political realities of the society * The three central coordination problems any economy must solve: 1. .color[What, and how much, to produce] 2. .color[How to produce it] 3. .color[For whom to produce it] ]] --- ## Microeconomics and Macroeconomics Economic theory is divided into two parts .row[.col-6[ **Microeconomics** is the study of individual choice, and how that choice is influenced by economic forces Microeconomics studies such things as: * The pricing policy of firms * Household's decisions on what to buy * How markets allocate resources among alternative ends ] .col-6[ **Macroeconomics** is the study of the economy as a whole Macroeconomics studies such things as: * Inflation * Unemployment * Economic growth ]] --- # Positive and Normative analysis .col-7[ The **positive analysis** uses theories and models to predict the consequences of a decision / change: 'What if ...?' * How does a quota on imports for foreign cars will impact on the sales of domestic cars? * What would be the effects of an increase in the gasoline tax? The **normative analysis** is devoted to questions concerning 'what ought to be?' * Should the government reduce the tax for diesel vehicles with particulate filters? * Should the government tax the consumption of fossil fuels more? The **Art of economics** is using the knowledge of positive economics to achieve the goals determined in normative economics ] --- # Methods of Economists: Theory and Models .col-7[ Theories are used to formulate observed phenomena based on rules and assumptions. * Theory of the Firm * Consumption Theory Models are (mathematical) representations of a theory. * simplified, abstract representation of the real world * some characteristics may have been left out * As simple as possible but not simpler. ] --- # Theory and Models ### Assumptions and Conclusions .col-7[ **Simplifying assumptions** facilitate the analysis without influence the conclusions derived from a model. **Critical Assumptions** influence the conclusions derived from a model. ] ### The development of the theory .col-7[ The review and improvement of the theories is central to the development of economics as a science. ] ### The confirmation of a theory .col-7[ The validity of a theory is determined by the quality of their predictions given the assumptions. ] --- class: practice-slide .col-8[ Who is more likely to work long hours in a laboratory researching new cures for diseases? 1. a scientist who earns a percentage of the profits from any new medicine she might invent, or 2. a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine? ] --- # 1. Incentives Matter * rewards and penalties that motivate behavior. * People respond to incentives in predictable ways. * Self-interest is an important incentive in economics. --- # 2. Good Institutions Align Self-Interest with the Social Interest .col-7[ * Markets magically align your self-interest with social interest (usually) * "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." ] --- # 3. Trade-offs Are Everywhere .center[![](img/college.png)] --- # Opportunity Cost .col-7[ * Opportunity cost is the benefit forgone of the next-best alternative to the activity you have chosen * Opportunity cost should always be less than the benefit of what you have chosen * Opportunity cost is the basis of cost/benefit economic reasoning Examples of opportunity cost: Individual decisions * The opportunity cost of college includes: * Items you could have purchased with the money spent for tuition and books * Loss of the income from a full-time job Government decisions * The opportunity cost of money spent on the war on terrorism is less spending on health care or education ] --- class: practice-slide .col-8[ What would happen if the punishment for lesser crimes is increased (say, mandatory execution for drug dealers)? ] --- # 4. Thinking on the Margin .col-7[ * Actual trade-offs are usually __on the margin.__ * Marginal means additional * Most economic choices are marginal choices ] ### Marginal costs and marginal benefits .row[.col-6[ Using economic reasoning, decisions are often made by comparing marginal costs and marginal benefits * **Marginal cost** is the additional cost over and above costs already incurred * **Marginal benefit** is the additional benefit above and beyond what has already accrued ] .col-6[ The economic decision rule: * If the marginal benefits of doing something exceed the marginal costs, do it. **MB > MC `\(\Rightarrow\)` Do it!** * If the marginal costs of doing something exceed the marginal benefits, don't do it. **MB < MC `\(\Rightarrow\)` Don't it!** ]] --- # 5. The Power of Trade .center[ <iframe width="802" height="451" src="https://www.youtube.com/embed/jbkSRLYSojo" frameborder="0" allow="accelerometer; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> https://youtu.be/jbkSRLYSojo ] --- ## 6. The Importance of Wealth & Economic Growth .row[ .col-3[ Wealth brings higher standards of living: Wealth and Health go together] .col-9[ <img src="img/gdpsurvival.png" width="100%" /> ]] --- ## Why are some countries rich and others poor? .center[![](img/wealth.png)] --- # Everyone Used to be Poor ![](img/gdptrend.png) --- # 7. Institutions Matter Incentives are sometimes lacking. Strong institutions that support these incentives foster economic growth. ![](img/korea.jpg) --- # Economic Institutions .col-7[ * To apply economic theory to reality, you've got to have a sense of economic institutions * Economic institutions are laws, common practices, and organizations in a society that affect the economy * Economic institutions differ significantly among nations * They sometimes seem to operate differently than economic theory predicts ] --- # Growth-Compatible Institutions .col-7[ * Property rights * Informal property rights limit borrowing by the poor, and hence limit growth * When individuals get much of the gains of growth themselves, they work harder * Competitive and open markets * Markets and private ownership of property foster economic growth * Corporations are growth-compatible institutions because of limited liability, which gives stockholders an incentive to invest their savings in large enterprises * Honest Government * A dependable legal system * Political stability ] --- ## 8. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated .col-7[ Policymakers use **Fiscal** Policy and **Monetary** Policy to attempt to smooth out economic volatility. ] --- class: practice-slide .col-8[ Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called ``money'' and handing those out to its citizens? ] --- ## 9. Prices Rise When the Government Prints Too Much Money .col-7[ * Inflation is an increase in the general level of prices. * Heavily indebted nations often print money to pay down debt. ] --- # 10. Central Banking & Economic Policy Making Is a Hard Job .col-7[ * Helping the economy be stable * Balancing inflation and unemployment * Preventing banking crises? ]