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 How (macro) economy works. Applications to Economic Policy and Current Events.

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.

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

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.

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 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.

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

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?

ANSWER: The MARKET! Adam Smith ( ) 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?

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.

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.

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