Upload
others
View
39
Download
0
Embed Size (px)
Citation preview
2Basic
Macro
econom
ics
Thin
kin
g L
ike a
n E
conom
ist
Thin
king L
ike a
n E
conom
ist
•E
conom
ics tra
ins y
ou to
. . . .
•T
hin
k in
term
s o
f alte
rna
tive
s.
•E
va
lua
te th
e c
ost o
f ind
ivid
ua
l an
d s
ocia
l ch
oic
es.
•E
xa
min
e a
nd
un
de
rsta
nd
ho
w c
erta
in e
ve
nts
an
d is
su
es a
re
rela
ted
.
TH
E E
CO
NO
MIS
T A
S A
SC
IEN
TIS
T
•T
he e
conom
ic w
ay o
f thin
kin
g . . .
•In
vo
lve
s th
inkin
g a
na
lytic
ally
an
d o
bje
ctiv
ely.
•M
ake
s u
se
of th
e s
cie
ntific
me
tho
d.
The S
cientific M
eth
od: O
bse
rvatio
n, T
heory, a
nd
More
Obse
rvatio
n
•U
ses a
bstra
ct m
odels
to h
elp
expla
in h
ow
a c
om
ple
x, re
al
world
opera
tes.
•D
evelo
ps th
eorie
s, c
olle
cts
, and a
naly
zes d
ata
to e
valu
ate
the th
eorie
s.
The R
ole
of A
ssum
ptio
ns
•E
conom
ists
make a
ssum
ptio
ns in
ord
er to
make th
e
world
easie
r to u
nders
tand.
•T
he a
rt in s
cie
ntific
thin
kin
g is
decid
ing w
hic
h
assum
ptio
ns to
make.
•E
conom
ists
use d
iffere
nt a
ssum
ptio
ns to
answ
er d
iffere
nt
questio
ns.
Eco
nom
ic Models
•E
conom
ists
use m
odels
to s
implify
reality
in o
rder to
impro
ve o
ur u
nders
tandin
g o
f the w
orld
•Tw
o o
f the m
ost b
asic
econom
ic m
odels
inclu
de:
•T
he
Circ
ula
r Flo
w D
iag
ram
•T
he
Pro
du
ctio
n P
ossib
ilities F
ron
tier
Our F
irst Model: T
he C
ircula
r-Flo
w D
iagra
m
•T
he c
ircu
lar-flo
w d
iag
ram
is a
vis
ual m
odel o
f the
econom
y th
at s
how
s h
ow
dolla
rs flo
w th
rough m
ark
ets
am
ong h
ousehold
s a
nd firm
s.
Fig
ure
1 T
he C
ircula
r Flo
w
Co
pyrig
ht ©
2004 S
ou
th-W
este
rn
Spendin
g
Goods a
nd
serv
ices
bought
Revenue
Goods
and s
erv
ices
sold
Labor, la
nd,
and c
apita
l
Incom
e
= F
low
of in
puts
and o
utp
uts
= F
low
of d
olla
rs
Facto
rs o
f
pro
ductio
n
Wages, re
nt,
and p
rofit
FIR
MS
•Pro
duce a
nd s
ell
goods a
nd s
erv
ices
•Hire
and u
se fa
cto
rs
of p
roductio
n
•Buy a
nd c
onsum
e
goods a
nd s
erv
ices
•Ow
n a
nd s
ell fa
cto
rs
of p
roductio
n
HO
US
EH
OLD
S
•Household
s s
ell
•Firm
s b
uy
MA
RK
ET
S
FO
R
FA
CT
OR
S O
F P
RO
DU
CT
ION
•Firm
s s
ell
•Household
s b
uy
MA
RK
ET
S
FO
R
GO
OD
S A
ND
SE
RV
ICE
S
Our F
irst Model: T
he C
ircula
r-Flo
w D
iagra
m
•F
irms
•P
rod
uce
an
d s
ell g
oo
ds a
nd
se
rvic
es
•H
ire a
nd
use
facto
rs o
f pro
du
ctio
n
•H
ousehold
s
•B
uy a
nd
co
nsu
me
go
od
s a
nd
se
rvic
es
•O
wn
an
d s
ell fa
cto
rs o
f pro
du
ctio
n
Our F
irst Model: T
he C
ircula
r-Flo
w D
iagra
m
•M
ark
ets
for G
oods a
nd S
erv
ices
•F
irms s
ell
•H
ou
se
ho
lds b
uy
•M
ark
ets
for F
acto
rs o
f Pro
ductio
n
•H
ou
se
ho
lds s
ell
•F
irms b
uy
Our F
irst Model: T
he C
ircula
r-Flo
w D
iagra
m
•F
acto
rs o
f Pro
ductio
n
•In
pu
ts u
se
d to
pro
du
ce
go
od
s a
nd
se
rvic
es
•L
an
d, la
bo
r, an
d c
ap
ital
Our S
eco
nd M
odel: T
he P
roductio
n P
ossib
ilities
Fro
ntie
r
•T
he p
rod
uctio
n p
ossib
ilities fro
ntie
ris
a g
raph th
at
show
s th
e c
om
bin
atio
ns o
f outp
ut th
at th
e e
conom
y c
an
possib
ly p
roduce g
iven th
e a
vaila
ble
facto
rs o
f pro
ductio
n
and th
e a
vaila
ble
pro
ductio
n te
chnolo
gy.
Fig
ure
2 T
he P
roductio
n P
ossib
ilities F
rontie
r
Co
pyrig
ht©
2003 S
ou
thw
este
rn/T
ho
mso
n L
earn
ing
Pro
du
ctio
n
po
ssib
ilities
fron
tier
A
B
C
Qu
an
tity o
f
Ca
rs P
rod
uc
ed
2,2
00
60
0
1,0
00
30
00
70
0
2,0
00
3,0
00
1,0
00
Qu
an
tity o
f
Co
mp
ute
rs
Pro
du
ce
d
D
Our S
eco
nd M
odel: T
he P
roductio
n P
ossib
ilities
Fro
ntie
r
•C
oncepts
Illustra
ted b
y th
e P
roductio
n P
ossib
ilities
Fro
ntie
r
•E
fficie
ncy
•T
rad
eo
ffs
•O
pp
ortu
nity
Co
st
•E
co
no
mic
Gro
wth
Fig
ure
3 A
Shift in
the P
roductio
n P
ossib
ilities F
rontie
r
Co
pyrig
ht ©
2004 S
ou
th-W
este
rn
E
Qu
an
tity o
f
Ca
rs P
rod
uc
ed
2,0
00
70
0
2,1
00
75
00
4,0
00
3,0
00
1,0
00
Qu
an
tity o
f
Co
mp
ute
rs
Pro
du
ce
d
A
Micro
eco
nom
ics and M
acro
eco
nom
ics
•M
icro
eco
no
mic
sfo
cuses o
n th
e in
div
idua
l parts
of th
e
econom
y.
•H
ow
ho
use
ho
lds a
nd
firms m
ake
de
cis
ion
s a
nd
ho
w th
ey in
tera
ct in
sp
ecific
ma
rke
ts
•M
acro
eco
no
mic
slo
oks a
t the e
conom
y a
s a
whole
.
•E
co
no
my-w
ide
ph
en
om
en
a, in
clu
din
g in
flatio
n, u
ne
mp
loym
en
t, an
d
eco
no
mic
gro
wth
TH
E E
CO
NO
MIS
T A
S P
OLIC
Y
AD
VIS
OR
•W
hen e
conom
ists
are
tryin
g to
expla
in th
e w
orld
, they a
re
scie
ntis
ts.
•W
hen e
conom
ists
are
tryin
g to
change th
e w
orld
, they a
re
polic
y a
dvis
or.
PO
SIT
IVE
VE
RS
US
NO
RM
AT
IVE
AN
ALY
SIS
•P
ositiv
e s
tate
me
nts
are
sta
tem
ents
that a
ttem
pt to
describ
e th
e w
orld
as it is
.
•C
alle
d d
escrip
tive
an
aly
sis
•N
orm
ativ
e s
tate
me
nts
are
sta
tem
ents
about h
ow
the
world
should
be.
•C
alle
d p
rescrip
tive
an
aly
sis
PO
SIT
IVE
VE
RS
US
NO
RM
AT
IVE
AN
ALY
SIS
•P
ositiv
e o
r Norm
ativ
e S
tate
ments
?
•A
n in
cre
ase
in th
e m
inim
um
wa
ge
will c
au
se
a d
ecre
ase
in
em
plo
ym
en
t am
on
g th
e le
ast-s
kille
d.
PO
SIT
IVE
•H
igh
er fe
de
ral b
ud
ge
t de
ficits
will c
au
se
inte
rest ra
tes to
incre
ase
.
PO
SIT
IVE
?
??
PO
SIT
IVE
VE
RS
US
NO
RM
AT
IVE
AN
ALY
SIS
•P
ositiv
e o
r Norm
ativ
e S
tate
ments
?
•T
he
inco
me
ga
ins fro
m a
hig
he
r min
imu
m w
ag
e a
re w
orth
mo
re
tha
n a
ny s
ligh
t red
uctio
ns in
em
plo
ym
en
t.
NO
RM
AT
IVE
•S
tate
go
ve
rnm
en
ts s
ho
uld
be
allo
we
d to
co
llect fro
m to
ba
cco
co
mp
an
ies th
e c
osts
of tre
atin
g s
mo
kin
g-re
late
d illn
esse
s a
mo
ng
th
e p
oo
r.
NO
RM
AT
IVE
?
??
WH
Y E
CO
NO
MIS
TS
DIS
AG
RE
E
•T
hey m
ay d
isagre
e a
bout th
e v
alid
ity o
f alte
rnativ
e
positiv
e th
eorie
s a
bout h
ow
the w
orld
work
s.
•T
hey m
ay h
ave d
iffere
nt v
alu
es a
nd, th
ere
fore
, diffe
rent
norm
ativ
e v
iew
s a
bout w
hat p
olic
y s
hould
try to
accom
plis
h.
Table
2 Te
n P
ropositio
ns a
bout W
hich
Most E
conom
ists Agre
e
Co
pyrig
ht ©
2004 S
ou
th-W
este
rn
Sum
mary
•E
conom
ists
try to
addre
ss th
eir s
ubje
cts
with
a s
cie
ntis
t’s
obje
ctiv
ity.
•T
he
y m
ake
ap
pro
pria
te a
ssu
mp
tion
s a
nd
bu
ild s
imp
lified
mo
de
ls in
o
rde
r to u
nd
ers
tand
the
wo
rld a
rou
nd
the
m.
•T
wo
sim
ple
eco
no
mic
mo
de
ls a
re th
e c
ircu
lar-flo
w d
iag
ram
an
d th
e
pro
du
ctio
n p
ossib
ilities fro
ntie
r.
Sum
mary
•E
conom
ics is
div
ided in
to tw
o s
ubfie
lds:
•M
icro
eco
nom
ists
stu
dy d
ecis
ion
ma
kin
g b
y h
ou
se
ho
lds a
nd
firms in
th
e m
ark
etp
lace.
•M
acro
econ
om
ists
stu
dy th
e fo
rce
s a
nd
tren
ds th
at a
ffect th
e
eco
no
my a
s a
wh
ole
Sum
mary
•A
positiv
e s
tate
ment is
an a
ssertio
n a
bout h
ow
the w
orld
is.
•A
norm
ativ
e s
tate
ment is
an a
ssertio
n a
bout h
ow
the
world
ought to
be.
•W
hen e
conom
ists
make n
orm
ativ
e s
tate
ments
, they a
re
actin
g m
ore
as p
olic
y a
dvis
ors
than s
cie
ntis
ts.
Sum
mary
•E
conom
ists
who a
dvis
e p
olic
ym
akers
offe
r conflic
ting
advic
e e
ither b
ecause o
f diffe
rences in
scie
ntific
judgm
ents
or b
ecause o
f diffe
rences in
valu
es.
•A
t oth
er tim
es, e
conom
ists
are
unite
d in
the a
dvic
e th
ey
offe
r, but p
olic
ym
akers
may c
hoose to
ignore
it.