Global Macroeconomics

Taggert J. Brooks

What is Economics?

Economics is the study of the allocation of scarce resources in an attempt to satisfy unlimited wants

More generally it is the study of human decision making particularly as it relates to markets.

Who gets what and how they get it

Microeconomics and Macroeconomics

Microeconomics is the study of the economic behavior of decision makers

Macroeconomics is the study of the behavior of entire economies

Sub-Fields (disciplines)

Micro International Trade Industrial Organization Labor Health

Macro International Finance Money and Banking Economic Development

Scarcity: the central problem of economics

Economic good production involves an opportunity

cost scarce resources are used in its

production Free good production involves no opportunity

cost

Trade-off

A trade-off occurs every time we choose to allocate scarce resources to the production of a good

The trade-off for taking IB Economics is that you are unable to take all the other courses offered in the same period

Opportunity Cost

The opportunity cost of that choice is the value of the next-best alternative use of the resources

The opportunity cost is the specific course you would have taken if you were not taking Economics

Opportunity Cost vs Financial cost

Economic Costs are always based on opportunity costs

Financial costs only take into account the monetary cost of a choice.

Opportunity cost is a much more specific concept in terms of the true consequences of a decision.

Behavioral Assumptions

A behavioral assumption describes the expected behavior of economic actors

Rational Self-Interest

Individuals rationally select alternatives they perceive to be in their best interests

Self-interest = rationality

Economic Actors

Households Firms Government Rest of the World

Markets

A market is a set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms

Product Market A market in which

goods and services are exchanged

Resource Market A market in which

resources are exchanged

Resources: Factors of Production

Land Natural resources used in the

production of goods and services

Labor

The physical and mental effort of humans

Capital

Buildings, equipment, machinery

Entrepreneurial Ability

Managerial, organizationalskills

risk-taking

Payment for Resources

Rent

Wages

Interest

Profit

Economic Modeling

The circular flow model The circular flow model

Firms Households

The circular flow of goods and incomesThe circular flow of goods and incomesGoods and services

Goods and services

£Consumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

£Consumer

expenditure

Factors of production: Land, labor, capital, entrepreneurship

The circular flow modelThe circular flow model

Goods and services

£Consumer

expenditure

Rent, Wages, InterestProfit

£

factors of production:land, labor, capital, entrepreneurship

The circular flow model The circular flow model

Ceteris Paribus(“other things constant”)

When focusing on key economic variables, other variables are held constant

This is important for model building As economic models become more

complex, fewer and fewer variables will be held constant

Common Mistakes

Fallacy of Composition The belief that what is true of one is true of

the whole.

"Every player on the team is a superstar and a great player, so the team is a great team." This is fallacious since the superstars might not be able to play together very well and hence they could be a lousy team.

More Examples: http://www.nizkor.org/features/fallacies/composition.html

Post-Hoc Fallacy

Correlation Causation

SAT scores and College GPA Presidential Election winner

and Height

The reach of Economic Research

Economists have done research into areas not normally

considered economics, by asking questions such as Why are Americans so obese? What is more dangerous a gun or a

pool? Is the death penalty efficient? What’s in a name?Leavitt & Dubner: “

FREAKONOMICS”