1. 1. INTRODUCTION TO ECONOMICS
POLITICAL ECONOMY OF GROWTH SECS-P01, CFU 9 Finance and Development academic year
1. INTRODUCTION TO ECONOMICS
Roberto Pasca di Magliano
Fondazione Roma Sapienza-Cooperazione Internazionale

2. What is Economics?
Economics is a social science which studies the choices of the economic agents and the interaction that establishes itself among the single choices.
In other words, it studies the modality through which individuals, organizations and enterprises employ scarce resources to produce various types of goods and services, as well as the ways in which they are distributed among the subjects (families, entreprises) to satisfy their present or future needs.
Economics assume that the choices of the agents are:
based on a criteria of rationality
aimed to maximize objectives of individual interest (profits, utility, etc.)
Roberto Pasca di Magliano

3. Partial list of topics (not enough)
The list (even if enriched) is not enough to define the economic science.
These topics are not the sole interest of economics but they also concern:
Other disciplines (sociology, law, etc.)
Social actors (enterprises, banks, trade unions, etc.)
Institutions (either local, national or international)
It is necessary to specify the point of view and the method that the economist chooses to use while studying these topics.
Roberto Pasca di Magliano

4. General Principles: Scarcity
Scarcity of resources happens everytime that, given the needs of a society at a given time, the means available to satisfy them are not sufficient.
A consequence of scarcity is that society, institutions, organizations and individuals are almost always forced to choose within a limited set of possibilities between objectives and scarce means applicable to alternative uses.
Scarce means that any resource acquires a value (price)
Roberto Pasca di Magliano

5. General Principles: Reliable information
It is assumed that all the data relative to the prices of any good and to the available technologies:
are known
available a-priori both to the entreprises who produce goods, and to the consumers who buy them.
Roberto Pasca di Magliano

6. General Principles conclusion: Rationality, Scarsity and full Information
Fundamental principles on which are based most of economic analyses is the rationality of choices.
Rationality assumes that economic agents’ behavior uses standard criteria as it is assumed that everybody is perfectly capable of assessing the costs and the benefits following each available set of alternative scenario.
Scarsity assumes that production resources are avallabile in limited quantities and then they have to be used alternatively in different production process
Perfect information assumes that all the economic agents has full access to data set and administrative information
Roberto Pasca di Magliano

7. Microeconomics The main topics it deals with are:
1. Consumer Choice Theory
How a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases
2. Theory of Production
How a firm chooses the inputs to be used and in which quantity, as well as how it decides about production mix
3. Market Structure
Characteristics and degree of market power held by sellers and buyers
Roberto Pasca di Magliano

8. Macroeconomics The main topics it deals with are: 1. National Income
How to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc.
2. Employment
Causes, typologies (structural, conjonctural), consequences
3. Political economy
Fiscal policies (taxes, transfers, public investments) , as it is run by the State
Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank
Roberto Pasca di Magliano

9. The main topics it deals with are:
Macroeconomics
The main topics it deals with are:
1. National Income
How to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc.
2. Employment
Causes, typologies (structural, conjonctural), consequences
3. Political economy
Fiscal policies (taxes, transfers, public investments) , as it is run by the State
Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank
Roberto Pasca di Magliano

10. Macroeconomics– Evidence from Great Depression
Modern Macroeconomics is due to John Maynard Keynes, author of The General Theory of Employment, Interest and Money. He argued:
During the Great Depression (Wall Street, 1929) the loss of output by the private sector results of a systemic shock ought to be filled by government spending.
Business lost access to capital, so it had dismissed workers.
Workers had less to spend as consumers, consumers bought less from business
Higher incomes people have a lower marginal propensity to consume their incomes while people with lower incomes are inclined to spend their earnings immediately
This lowered the rate of growth. Spending should therefore target public works programmes on a large enough scale to speed up growth to its previous levels.
Roberto Pasca di Magliano

11. Macroeconomics– Aggregate Demand
Aggregate demand (D) is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the demand for gross domestic product, even called effective demand
D = C + I + G + (X – M) = Y < or = S
where:
C is consumption (may also be known as consumer spending) = basic consumption (a) + propensity to consume available income b (Y – T),
I is Investment (demand componet as inversly related to interest rate)
G is Government spending, vomposed by taxes (T) devoted to public consumption and public investment
X – M is net export, i.e. surplu or deficit of the balance of payment
Y is national income
S is the maximum potential domestic production
Roberto Pasca di Magliano

12. Keynesian economy: main issues to remember
In the short run, during recession, economy is influenced by aggregate demand (Y) that is not general equal di potential productive capacity
Productive capacity of the economy is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.
Keynesian economists argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle. Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions.
Roberto Pasca di Magliano

13. Macroeconomics– Aggregate Demand curve
Roberto Pasca di Magliano

14. Macroeconomics– Aggregate Demand, dept role
A Post-Keynesian theory of aggregate demand emphasizes the role of dept, which it considers a fundamental component of aggregate demand; the contribution of change in debt to aggregate demand is referred to by some as the credit impulse.
Aggregate demand is spending, be it on consumption, investment, or other categories. Spending is related to income via:
Income – Spending = Net Savings
Rearranging this yields:
Spending = Income – Net Savings = Income + Net Increase in Debt
In words: what you spend is what you earn, plus what you borrow: if you spend $110 and earned $100, then you must have net borrowed $10; conversely if you spend $90 and earn $100, then you have net savings of $10, or have reduced debt by $10, for net change in debt of –$10.
Roberto Pasca di Magliano

15. Macroeconomics– Aggregate Demand, dept role implication
From the perspective of debt, the Keynesian prescription of government deficit spending in the face of an economic crisis consists of the government net dis-saving (increasing its debt) to compensate for the shortfall in private debt: it replaces private debt with public debt.
Other alternatives include seeking to restart the growth of private debt ("reflate the bubble"), or slow or stop its fall; and dept relief, which by lowering or eliminating debt stops credit from contracting (as it cannot fall below zero) and allows debt to either stabilize or grow. This has the further effect of redistributing wealth from creditors (who write off debts) to debtors (whose debts are relieved).
Dept sustaibility (or service to dept) depends on the country’s credibility in the world capital market
Roberto Pasca di Magliano