Summary of Macroeconomics

oppositemincedManagement

Oct 28, 2013 (3 years and 7 months ago)

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Summary of Macroeconomics


5 big questions


3 processes


8 fundamental ideas

5 big questions

1.
What to produce

2.
How to produce

3.
When to produce

4.
Where to produce

5.
Who produces

3 processes used in 2
approaches


Approaches


1.
Positive


How things are


2.
Normative


How things ought to
be


Processes/Tasks:

1.
Observing and
measuring


2.
Modeling


3.
Testing

Macroeconomic issues, by
approach


Positive Issues


Growth


tradeoff consumption
today for more future
consumption


Employment


+/
-


Inflation


+/
-


Budget Deficits


+/
-


Normative Issues


Fiscal Policy


Monetary Policy


8 fundamental ideas

1.
Choices
are
tradeoffs
because of
scarcity

2.
Choices
are made
at the margin
because of
incentives


Diminishing marginal returns:


“What have you done for me lately?”


“It’s never as good as the last time”

8 fundamental ideas

3.
Voluntary tradeoffs/exchange
make
transacting parties
better off
because of
rationality



Markets
are very
efficient
ways of
organizing this sort of exchange

4.
When
incentives
conflict with
marginal
choices, markets
may fail and
alternative
mechanisms
designed and employed
(contracts, government, clubs).

8 fundamental ideas

5.
Income = expenditure = gross value

6.
Productivity
gains enhance
living standards

8 fundamental ideas

7.
inflation occurs when production grows at a
slower rate than the quantity and use of money
in the economy

8.
Some unemployment is inevitable and
necessary


Fundamentals: Opportunity Cost


The value of a commodity as a function of
the next best, foregone alternative.


Resources are always scarce.


There is always a trade
-
off due to scarcity.


Opportunity cost is a mechanism that helps us
measure the value of trade
-
offs in making
decisions when resources are scarce.

Fundamentals: Marginal Benefits
and Costs


“Marginal” refers to accounting for the
benefit or cost of the “last” unit under
consideration for exchange.


Law of diminishing returns


Cumulative effect of scarcity


What has a commodity done for you lately?

Fundamentals: Production
Possibilities Frontier

Attainable/

inefficient

Attainable/

efficient

Attainable/

efficient

Attainable/

efficient

Unattainable

A

C

D

E

B

Fundamentals: Diminishing
Returns


Production Possibilities Frontiers bow outward
because of diminishing returns in production.


If a
scarce

resource yields large amounts of a
commodity, then using up the resource means that, to
keep making more of the commodity, we must use
less productive resources


The net result is that greater production of a
commodity results in rising opportunity costs

getting
less of one commodity for a greater amount
sacrificed.