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Macroeconomics, Chapter 1,2, and 3 Notes

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Macroeconomics, Chapter 1,2, and 3 Notes ECON 2133

Marketplace > East Carolina University > Economcs > ECON 2133 > Macroeconomics Chapter 1 2 and 3 Notes
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These notes go over Chapters 1, 2, and 3 of the Principles of Macroeconomics textbook along with some sample test questions and examples
Xuan Liu
Class Notes
Macroeconomics, chapter one, chapter 2, chapter 3, Micro-Foundation, Economics, Two Big Questions, Production Possibility Frontier, Gain from Trade, Economic Growth, absolute advantage, comparative advantage, Model Building, monopoly
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This 7 page Class Notes was uploaded by Notetaker Notetaker on Wednesday February 10, 2016. The Class Notes belongs to ECON 2133 at East Carolina University taught by Xuan Liu in Winter 2016. Since its upload, it has received 45 views. For similar materials see Macroeconomics in Economcs at East Carolina University.

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Date Created: 02/10/16
● Big Picture (structure): All the contents for this principle class can be divided into 5  sections as following:  ○ Micro­foundation: the principles that individuals make decisions  ○ Macro­concepts:  ■ Focus on 3 key variables: GDP, inflation and interest rates  ■ Later, we will talk about the determination of these variables and others  as well  ○ Individual markets:  ■ Labor market  ■ Loanable funds market (goods market): national savings and investment  (consumption)  ■ Money market: real money balance  ○ General equilibrium  ■ Put them together  ○ Topics  ■ Monetary Policy  ■ Fiscal Policy  ■ Oil Price Shocks  ■ Crises  ■ Forecasting  ■ .com                                              Micro­Foundation  1/14/16  Introduction of Economics  ● Definition of Economics  ○ Economics: the social science that studies the choices that individuals,  businesses, governments, and entire societies make as they cope with scarcity  and the incentives that influence and reconcile those choices  ○ Microeconomics: individual’s choices and firm’s decisions  ○ Macroeconomics: the whole economy  ■ John Maynard Keynes established macroeconomics  ■ Robert Jr. Lucas launched rational expectation revolution  ● Two Big Questions  ○ Question 1: What, how, and for whom goods and services get produced?  ■ What to produce?  ■ How to produce?  ● How to use four different major inputs: land, labor, capital, and  entrepreneurship  ■ For whom to produce?  ● Land earns rent  ● Labor earns wage  ● Capital earns interest  ○ Question 2: When do choices made in the pursuit of self­interest also promote  the social interest?  ■ Self­interest: Making choices that you think are best for you  ■ Social­interest: Making choices that you think are best for the whole  society  ● Do we produce the right things in the right quantities?  ● Do we use our factors of production in the best way?  ■ Why they may be different?  ● Globalization  ● The information­age economy  ● Economic Instability  ● Externality  ● Economic Ways of Thinking  ○ People face trade­offs  ○ The cost of something is what you give up to get it (opportunity cost)  ○ Rational people think at the margin  ○ People respond to incentives  ○ Trade can make everyone better off  ○ Markets are usually a good way to organize economic activities  ○ Governments can sometimes improve market outcomes  ○ A country’s standard of living depends on its ability to produce goods and  services  ○ Prices rise when the government prints too much money  ○ Society faces a short­run trade­off between inflation and unemployment    1/19/16  Sample Problems  ● How many major problems are economics trying to answer?  ○ 2  ● How many economic ways of thinking have we talked about in this class?  ● If the government prints too much money, then most likely the economy is going to  have?  ○ Inflation    Production Possibility Frontier (PPF)  ● Definition   ○ The boundary between those combinations of goods and services that can be  produced and those that cannot  ○ Usually we use PPF to denote Production Possibility Frontier  ● Examples  ○ Look at examples on BB powerpoint  ● Related Concepts  ○ Production efficiency  ■ Cannot produce more of one good without producing less of some other  goods  ○ Opportunity Cost  ■ Definition: the opportunity cost of one activity is the best alternative  forgone.  ○ Marginal Cost  ■ Opportunity cost of producing quantity we losenit of something  ■ Can be calculated as the ratioquantity we gain   1/21/16  Gain from Trade  ● Economic Growth  ○ Definition: One way to understand economic growth from the PPF perspective is  that the expansion of production possibilities­­ and increase is the standard of  living­­ can be regarded as economic growth  ○ Key factors that influence economic growth  ■ Technological change (A: productivity)  ■ Capital accumulation (K: physical capital)  ■ Increase of the labor force (N: labor force)  ■ Improvement of institution environment ( for example, China)  ■ Trade  ● Concepts related to trade  ○ Absolute Advantage:​ a person has an absolute advantage if that pers​ ore m producti​  than others  ■ Look at practice problems on BB  ○ Comparative Advantage (CA)​: a person has a comparative advantage in an  activity if that person can perform that activity at a l​ ower m​ than  cost  anyone else.  ■ Look at practice problems on BB  ● Examples  ○ How to gain?  ■ Specialize in production according to comparative advantage first and  then trade  ○ Production before trade  ■ How much is each of them going to produce before trade?  ■ This should be jointly determined with demand  ○ Specialization  ○ Trade  ○ The gain  ○ Another perspective to see that gain from trade  ■ Before trade, the consumption possibility set is bounded by the production  possibility set  ■ After trade, the consumption possibility set is expanded by the trade­line  and it is not bounded by the production possibility set any more  ● Discussions  ○ The similar discussions can be extended to the discussions about trade among  countries.  ○ Concepts  ■ A country’s PPF: the quantities of different goods that its economy can  produce  ■ Consumption Possibilities: the combinations of goods and services that a  country’s citizens might feasibly consume  ■ In a closed economy: Society’s production possibilities= consumption  possibilities. If a country is self­ sufficient, it is called autarky  ■ In an open economy: The society’s consumption possibilities are typically  greater than its production possibilities because of trade.    1/26/16  Model Building  ● In General  ○ Economists use models to understand the complex real­world economy  ○ Models are ​simplified​ versions of reality  ○ Models are built upo​ ssumptions  ○ Models are considered good if they predict accurat​ nd/or explain phenomena  well  ■ Example: Stagflation  ● Two Key Assumptions  ○ An assumption about the markets  ■ Four types of markets  ● There are numerous markets in every and each economy  ● Depending on the influence of market participant(s) on the price of  good or services in a market, we can categorize that market into  one of the four different types of markets:  ○ Competitive   ■ Characteristics of a competitive market  ● Many buyers and sellers  ● No one individual has any influence over the  price  ● The price is determined by the entire market  ■ Examples  ● One fisherman does not determine the price  of fish at the market  ● One farmer does not determine the price of  corn  ○ Monopoly  ○ Oligopoly  ○ Monopolistic competition   ○ An assumption about modeling  ■ Ceteris Paribus  ● “Ceteris Paribus” are Latin words meaning “other things being  equal” or “holding everything else constant”  ● For any given model, there are endogenous variables, which are  determined within the model, and exogenous variables, which are  determined outside the model.  ○ For example, the equilibrium price and the equilibrium  quantity of apples are two endogenous variables because  they are determined in the demand and supply model for  apples  ● In the general equilibrium models  ○ We will modify this assumption such that we will allow  more than endogenous variables in different market to  change at the same time, while still holding any other  variables constant. Keep in mind, whether a variable is  endogenous or exogenous in a model depends on the  questions that the model is trying to address.  ○ Such a modification, in terms of modeling, makes a big  difference between partial equilibrium analyses and  general equilibrium analyses.  ● In the partial equilibrium models  ○ This assumption allows us to examine a change in one  exogenous variable, while holding all other exogenous  variables constant, on endogenous variables.  ○ Essentially, this assumption allows us to isolate the effect  of a single exogenous variable.  ■ Mathematical Examples  ● Example 1: suppose y = 2x + z 1   ○ Endogenous variables: x and y are endogenous variables.  For examples, the quantity of one good and the price of  one good  ○ Exogenous variables: z 1 is an exogenous variable. For  convenience, I call it as a shifting variable.    ● Example 2: suppose y =  2x + z 1+  z2   ○ Endogenous variables: x and y are endogenous variables  ○ Exogenous variables: z 1 and z2  are exogenous variables  (shifting factors)  ● Example 3: suppose Q = 2p  + z  1 z 2   ○ Endogenous variables: Q (the quantity) and p  (the relative  price) are endogenous variables  ○ Exogenous variables: z 1 and z2  are exogenous variables  (shifting factors)  ● Example 4: suppose p = 2Q + z  1 z 2+ z 3   ○ Endogenous variables: Q (the quantity) and p  (the relative  price) are endogenous factors  ○ Exogenous variables: z  ,z  , z   are exogenous variables  1 2 3 (shifting factors)  ● Demand and Supply (D/S) Model  ○ Demand  ■ Definition: The relationship between the quantity demanded and its  relative price, holding everything else constant  ■ Related Concepts  ● Preferences  ○ What you like and what you do not like  ○ Marginal benefit  ● Demand Curve   ○ What will the corresponding demand curve look like once  you have read the definition of demand?  ○ Movement: only the relative price causes a movement  along the demand curve  ○ Shifts: many factors (not including p and Q) cause shifts  of the demand curve  ● Movement along the demand curve vs. shift of the demand curve  ○ Supply   ■ Definition: The relationship between the quantity supplied and its relative  price, holding… constant  ■ Related Concepts  ● PPF  ● Supply Curve  ○ Movement: only the relative price causes a movement  along the supply curve  ○ Shifts: many factors (not including pand Q) cause shifts of  the supply curve  ○ Equilibrium  ■ Definition  ■ Characterization  ● To answer what will happen to the equilibrium, you have to answer  * (1) what will happen to the equilibrium pric  nd (2) what will  happen to the equilibrium quantity Q     ○ Allocative Efficiency  ■ Definition  ● When we cannot produce more of any one good without giving up  some other good ​ hat we value more high​  we have achieved  allocative efficiency   ● When we cannot produce more of any one good without giving up  some other good, we have achieved ​ roduction efficiency.   


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