Intermediate Macroeconomic Theory PDF

Intermediate Macroeconomic Theory Course Code: ECN 102 Course Description: The course deals with the analysis of macroeconomic concepts and principles relating to the national economy. The course focus on the graphical and mathematical analysis of the following issues: gross national product and...

Intermediate Macroeconomic Theory Course Code: ECN 102 Course Description: The course deals with the analysis of macroeconomic concepts and principles relating to the national economy. The course focus on the graphical and mathematical analysis of the following issues: gross national product and national income, consumption, savings and investment, demand and supply of money, inflation and unemployment, budget deficit and public debt, and fiscal and monetary policies. Learning Outcomes At the end of the unit, the students are expected to: 1. define basic economic terms; 2. discuss the importance of macroeconomics; 3. differentiate positive economics and normative economics; 4. identify and discuss the macroeconomic goals and policies; and 5. ascertain the relationship between macroeconomic variables like inflation rate, unemployment rate, growth rate, etc. Nature of Economics What is economics? - A branch of study that deals with the proper allocation of scarce resources to satisfy the unlimited human wants. What is the Use of Economics? Scarcity compels us to come up with less wasteful ways of running our societies. We all want progress and we all want to reduce hunger, poverty and inequality. But our resources are finite. Therefore, we can’t afford to run our societies in wasteful and inefficient ways. That’s where good economic policies have a crucial role to play. That’s where the economist can make a contribution. Wasted Resources: Stuck in Traffic We waste a lot of time stuck in traffic Economists would want to find a way to reduce this waste of time Building more roads  may not always be possible, may not solve the problem, and would be costly in any case Charging car owners for the use of a road may be the way to go Investing in or subsidizing public transport is another option Wasted Resources: Unemployment ▰ What can we do to reduce this waste of resources? ▰ Cut taxes to encourage people to go shopping? ▰ Build more roads and bridges? ▰ Make overtime work illegal? ▰ Limit imports? What is Scarcity? - is the basic and central economic problem confronting every society. - It is the heart of the study of economics and the reason behind its establishment. Concept of Opportunity Cost Opportunity Cost: - the value of the next best alternative. - It is the value of what is given up when one makes a choice.  Individual Decisions: In some cases, recognizing the opportunity cost can alter personal behavior.  Societal Decisions: Opportunity cost comes into play with societal decisions. Universal health care would be nice, but the opportunity cost of such a decision would be less housing, environmental protection, or national defense. These trade-offs also arise with government policies Examples ▰ The opportunity cost of college attendance includes: o the cost of tuition, books, and supplies, o foregone income (this is usually the largest cost associated with college attendance), and o Psychic (mental) costs. ▰ Opportunity cost of attending a movie:  o opportunity cost of tickets o opportunity cost of time o Opportunity cost of studying and reviewing your lessons Importance of Economics Positive and Normative Economics Positive economics  an economic analysis that considers economic conditions “as they are”, or considers economics “as it is”.  descriptive – what the world is like Normative economics  an economic analysis which judges economic conditions “as it should be”. prescriptive – what the world ought to be like Two Major Branches of Economics Micro vs. Macro  ▰ Macroeconomics: the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance. ▰ Microeconomics: the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and businesses. We learn about the theory of consumer behavior and the theory of the firm. Macroeconomics ▰ Macroeconomics deals with issues related to data that give summary descriptions of the economy of an entire nation. ▰ A macroeconomist would ponder questions such as, ╺ what would happen to Philippine’s unemployment rate if Japan suddenly stops trading with Philippines? and ╺ what policy should the government of Philippines then follow? ▰ The focus would always be on Philippines as a whole. Macroeconomic Issues ▰ What causes the growing poverty incidence in the Philippines? ▰ What causes unemployment? ▰ What are the impacts of the Covid-19 pandemic in the global economy? ▰ What causes prices to rise? ▰ Can government policies be used to improve economic performance? Macroeconomic Goals ▰ Full employment. A situation in which those who are able and are willing to work can get jobs. Those who do not like to work are not considered jobless. Under full employment, all the available productive resources are fully utilized. ▰ Economic growth. Economic growth is measured by the increase in a country’s total output or real Gross domestic Product (GDP) or Gross National Product (GNP). (Intelligent Economist)  The Gross Domestic Product (GDP) of a country is the total value of all final goods and services produced within a country over a period of time. Therefore an increase in GDP is the increase in a country’s production. (Intelligent Economist)  Gross National Product (GNP) is an estimate of total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. (Investopedia) ▰ Price Stability. This does not mean that prices remain constant or do not change, rather, it is a situation where price fluctuations are smooth. This makes the average price level stable.  ▰ Balance of payments and exchange rate stability. The balance of payments (BOP) refers to the accounting record of a country’s financial transactions with other countries. When inflows are greater than outflows, a country has a surplus balance of payments. An opposite situation is a deficit balance of payments. ▰ Efficiency. Efficiency is productivity. It is concerned with the optimal production and distribution of scarce resources. (economicshelp.org) ▰ Equitable distribution of wealth and income. The word equitable means fair or just. There is equitable distribution of wealth and income if the gap between the rich and the poor is narrow. When every member of the society experiences a decent standard of living and a dignifies existence. Importance of Macroeconomics Limitations of Macroeconomics Macroeconomic Models Economic Model: a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior. Economic Models and Math Economic models can be represented using words or using mathematics. Algebra and graphs are utilized to explain economic models. Using Economic Models: Examples Key Concepts in Macroeconomics Employment - a situation in which every able bodied person who is willing to work at the prevailing rate of wages. Employment rates are defined as a measure of the extent to which available labour resources (people available to work) are being used. The International Labour Organization (ILO) definition of unemployment is those aged 16 or over are unemployed if they are: 1. Out of work, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks. 2. Out of work, have found a job and are waiting to start it in the next two weeks. Business cycle is the natural rise and fall of economic growth that occurs over time. (Investopedia) Trough/Depression: An especially lengthy and deep decline in output. It is the turning point of recession, or when economic activity is at its lowest. Peak/Prosperity: During the business cycle, the highest point of output before a recession begins. Recession: A significant decline in national output typically a minimum of six months. Expansion: In this phase there is recovery in the economy wherein income, output, trade, interest rate, wage and unemployment are rising, meaning unemployment is low. Production Possibilities Frontier (PPF) Shows all combinations of goods and services that can be produced given available resources and technology. Suppose there are only two goods… … the production possibilities frontier, is a graph showing the various combinations of output that can be produced when all resources are being utilized in the most (productively) efficient manner possible, given the current level of technology. Production Possibilities in a Two-Good Economy Consider an economy that produces computers and cars How can we illustrate the production possibilities for this economy using a graph? Attainable and Unattainable Economic Growth – Long Run Why Does the PPF Bow Outward? PPF does not necessarily have to be concave! But it is reasonable assumption. Why? Because not all resources are equally suited at producing the same good. Computer manufacturers make poor car makers and vice-versa. If more and more resources were diverted into the production of cars say, then even computer manufacturers would find themselves on the automobile assembly line. But their productivity would be low. Relationship Among Macroeconomic Variables “Okun’s Law,” which stipulated that for every 3 percent rise in the rate of economic growth above the economy’s long-term potential growth rate, unemployment would decrease by 1 percent (Britannica)  Phillip’s Curve Additional learning Materials: Phillip’s curve https://www.youtube.com/watch?v=v7ZWTZ9NgU4 Okun’s Law https://www.youtube.com/watch?v=liieM1FIf1E Critical Thinking Questions 1. Explain why scarcity leads to tradeoffs. 2. Do economists have any particular expertise at making normative arguments? In other words, they have expertise at making positive statements (i.e., what will happen) about some economic policy, for example, but do they have special expertise to judge whether or not the policy should be undertaken? 3. A consultant works for P200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables? 4. Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. 5. As economics students, what do you think is the essence of studying economics in understanding the impact of the Covid-19 pandemic on the people and the global economy? END Prepared by: Prof. Jay Pee Ilacas Faculty In-charge