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”
