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Macroeconomics Week 2

by: Kiera Mossburger

Macroeconomics Week 2 ECON 200-002

Kiera Mossburger

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About this Document

These notes cover topics that were discussed last week in class. Topics include positive and normative economics, models, and issues in macroeconomics
Principle Macroeconomics
Paul George Burkett
Class Notes
25 ?




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This 3 page Class Notes was uploaded by Kiera Mossburger on Sunday September 4, 2016. The Class Notes belongs to ECON 200-002 at Indiana State University taught by Paul George Burkett in Fall 2016. Since its upload, it has received 14 views. For similar materials see Principle Macroeconomics in Macro Economics at Indiana State University.

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Date Created: 09/04/16
Macroeconomics­ Week 2 Positive Economics  finding facts/ making observations OR pure prediction (hypothetical with facts)  Testable and factual  Objective  Keeps values out o Values: ideas about good and bad, right and wrong  Ex: “The sun will come out and provide light”   Positive doesn’t mean there can’t be a disagreement Normative Economics  What should be? Or What should happen?   Not testable  Subjective  Based on values  There are normally disagreements based on conflicting values  o Everyone wants their opinions to be right The Relationship Between the Two  The mainstream claims “Separate the normative and the positive. Leave the positive to  the economist and the normative to the preachers and politicians” o BUT, it’s hard to keep ALL the values out o Free pursuit of objective analysis is a value judgement in itself Never Purely a Positive Analysis  Choice of subject matter o Why choose one profession over another?  Values  Choice of questions to ask/not ask o What are you going to look at once in that profession?   Conclusive testing isn’t always possible o Conclusive test­ a test that will decide which model is more accurate and which  ones need to be altered o Choice of model can be value­determined/ politically best  Economists are part of the economy o They have economic interests about their role in the world o  Ex: Mankiw  Economist who received $3 million for claiming he will write a book  Conservative book because of its role in economy  Which affected Mankiw’s choice of model  How to cope?  Be objective and upfront with our values Models (Theories)  Helps us understand something we didn’t understand before   It’s a simplification  Economic Model­ set of assumptions (simplifications) used to understand and predict  economic processes   What assumptions?? o Behavioral­ dealing with humans   Goals of decision makers  Must be realistic  Ex: Making and maximizing profit  Information on problems they face                    Risks                               vs             True Uncertainty  Odds are known  Odds unknown  Can make calculated decisions  Can assume that history repeats itself   Instability   Confidence   Entrepreneurs  o Exogenous & Endogenous  Exogenous­ taken as given in model, not affected by other variables in the  system. Not determined in the model   Ex: customer incomes, rainfall  Endogenous­ determined/ predicted by the model  Ex: temperature, chance of rain  Ex: supply and demand  Overall Example: What are the exogenous and endogenous factors of  making and selling pizza in Terre Haute?  Exogenous  incomes of customers, cost of making pizza  Endogenous  price of pizza, quantity of pizza sold  Models have 2 languages o Qualitative­ using words and telling a story o Quantitative­ using numbers to create graphs and do math  To clarify an assumption  To make more precise predictions  To increase model testability using data Pitfalls in Models  Fallacy of composition­ treating a whole system as just the sum of the parts o Ex: Seeing a tree doesn’t mean you understand the whole forest o Ex: Keynes­ Paradox of Thrift  If everyone tries to save more as a whole, sales go down, then incomes go  down, then total saving go down  A generalized attempt to saving may defeat itself  Don’t treat income as exogenous in this case Three Big Issues in Macroeconomics 1. Level and Growth of Economic Activity 2. Jobs Picture (employment/ unemployment) 3. Price level & Inflation  Issue 1  PRODUCTION = SPENDING = INCOME o Measured activity, GDP (gross domestic production), isn’t the same as the well­ being of the economy’s population o 2 basic time frames  Short run  Production capacity is fixed  only a certain amount of resources  are available   Very long run  Productive capacity can increase significantly o Ex: Finding more natural resources o Ex: More workers o Ex: Advance in technology  Using resources more productively/ gaining more resources  Recession­ negative growth of GDP for 2 quarters in a row  Boom/ recovery­ positive growth of GDP Issue 2  Population growth   more unemployment  need more jobs  There are more people entering the work force than retiring  Technology replaces workers 


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