1. Principles of Macroeconomics
PowerPoint Presentations for
Principles of Macroeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa

2. Thinking Like an economist
Chapter 2

3. THINKING LIKE AN ECONOMIST
Before delving into the substance and details of economics, it is helpful to have an overview of how economists approach the world.
This chapter, therefore, discusses the field’s methodology.
What is distinctive about how economists confront a question?
What does it mean to think like an economist?

4. THE ECONOMIST AS SCIENTIST
Economists try to address their subject with a scientist’s objectivity.

5. The Scientific Method
The scientific method involves observation, theory, and more observation.
Economists use theory and observation like other scientists, but they do face an obstacle that makes their task especially challenging:
Experiments are often difficult in economics.
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6. The Role of Assumptions
Assumptions can simplify the complex world and make it easier to understand.
The art in scientific thinking is deciding which assumptions to make.

7. Economic Models
Economists also use models to learn about the world that are most often composed of diagrams and equations.
Economic models omit many details to allow us to see what is truly important.
All the models are built with assumptions.

8. Our First Model: The Circular-Flow Diagram
Circular-Flow Diagram: a visual model of the economy that shows how dollars flow through markets among households and firms

9. FIGURE 2.1: The Circular Flow
MARKET OF CONSUMPTION
FIGURE 2.1: The Circular Flow
MARKET OF PRODUCTION

10. Our Second Model: The Production Possibilities Frontier
Production Possibility Frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

11. FIGURE 2.2: The Production Possibilities Frontier

12. Active Learning Production Possibilities Frontier Example
Point on graph
Production
Computers
Wheat A
500 B
400
1,000 C
250
2,500 D
100
4,000 E
5,000

13. Active Learning Discussion Questions
A. On the graph, find the point that represents (100 computers, 3,000 tons of wheat), label it F. Would it be possible for the economy to produce this combination of the two goods? Why or why not?
B. Next, find the point that represents (300 computers, 3,500 tons of wheat), label it G. Would it be possible for the economy to produce this combination of the two goods?

14. Active Learning Answers
Point F: 100 computers, 3,000 tons wheat
Point F requires 40,000 hours of labour. Possible but not efficient: could get more of either good without sacrificing any of the other F

15. Active Learning Answers
Point G: 300 computers, 3,500 tons wheat
Point G requires 65,000 hours of labour. Not possible because economy only has 50,000 hours G

16. FIGURE 2.3: A Shift in the Production Possibilities Frontier

17. Microeconomics and Macroeconomics
Microeconomics: the study of how households and firms make decisions and how they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth

18. In what sense is economics like a science?
Draw a production possibilities frontier for a society that produces food and clothing.
Show an efficient point, an inefficient point, and an infeasible point.
Show the effects of a drought.
Define microeconomics and macroeconomics.

19. THE ECONOMIST AS POLICY ADVISER
When economists are trying to explain the world, they are scientists.
When they are trying to help improve it, they are policy advisers.

20. Positive versus Normative Analysis
Positive statements: claims that attempt to describe the world as it is
Normative statements: claims that attempt to prescribe how the world should be

21. Example of Normative VS Positive
The distinction between positive and normative statements is easily shows via examples. A positive statement:
The unemployment rate is currently at 9 percent.
since it conveys factual, testable information about the world.
Statements such as (below) are normative statements:
The unemployment rate is too high.
The government must take action in order to reduce the unemployment rate.

22. Active Learning Discussion Questions
Which of these statements are“positive”and which are “normative”? How can you tell the difference?
a. Prices rise when the government increases the quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause an increase in consumer demand for video rentals.

23. Active Learning Answers
a. Prices rise when the government increases the quantity of money.
Positive: describes a relationship, could use data to confirm or refute
b. The government should print less money.
Normative: this is a value judgment, cannot be confirmed or refuted

24. Active Learning Answers
c. A tax cut is needed to stimulate the economy.
Normative: another value judgment
d. An increase in the price of burritos will cause an increase in consumer demand for video rentals.
Positive: describes a relationship
Note: A statement need not be true to be positive.

25. TABLE 2.1: Websites of Some Major Economic Organizations

26. Why Economists’ Advice Is Not Always Followed
Any economist who advises government knows that his or her recommendations are not always heeded.
In the real world, figuring out the right policy is only part of the job for the government.

27. Give an example of a positive statement and an example of a normative statement.
Name three parts of government that regularly rely on advice from economists.

28. WHY ECONOMISTS DISAGREE
There are two basic reasons:
They can disagree about the validity of alternative positive theories about how the world works.
They can have different values and, therefore, different normative views about what a policy should try to accomplish.
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29. Differences in Scientific Judgments
Economists often disagree about the direction in which truth lies.
For example, economists disagree about whether the government should levy taxes based on a household’s income or its consumption.

30. Differences in Values
Suppose that Peter and Paula both take the same amount of water from the town well. To pay for maintaining the well, the town taxes its residents. Peter has income of $ and is taxed $5000, or 10 percent of his income. Paula has income of $ and is taxed $2000, or 20 percent of her income.
Is this policy fair?
If not, who pays too much and who pays too little?

31. Perception versus Reality
Because of differences in scientific judgments and differences in values, some disagreement among economists is inevitable.
But they do often share a common view.

32. Perception versus Reality
A ceiling on rents reduces the quantity and quality of housing available. (93 percent)
Tariffs and import quotas usually reduce general economic welfare. (93 percent)
Flexible and floating exchange rates offer an effective international monetary arrangement. (90 percent)

33. Perception versus Reality
Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90 percent)
The government should not restrict employers from outsourcing work to foreign countries. (90 percent)
Economic growth in developed countries like Canada leads to greater levels of well-being. (88 percent)
Agricultural subsidies should be eliminated. (85 percent)

34. Why might economic advisers to the prime minister disagree about a question of policy?

35. Screwdrivers and Bloody Marys
Classroom Activity
Screwdrivers and Bloody Marys
Draw a graph with Bloody Marys on the horizontal axis and Screwdrivers on the vertical axis.
A Bloody Mary contains tomato juice and one shot of vodka. A Screwdriver contains orange juice and one shot of vodka. Assume that we have plenty of orange juice and tomato juice, but only one small bottle of vodka containing six shots.
How many Bloody Marys can we make, if we only make Bloody Marys?
How many Screwdrivers can we make if we only make Screwdrivers?
Could we make six of both drinks? Why not?
On your graph, show all of the possible combinations of Bloody Marys and Screwdrivers that can be made, given a small bottle of vodka.