Macroeconomics Week 2
Macroeconomics Week 2 ECON 200-002
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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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