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Chapter 2 Notes

by: Corinne Bobish

Chapter 2 Notes ECN 211

Corinne Bobish
GPA 2.7
Macroeconomic Principles

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Chapter 2: Thinking like an Economist
Macroeconomic Principles
Class Notes
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This 3 page Class Notes was uploaded by Corinne Bobish on Wednesday August 26, 2015. The Class Notes belongs to ECN 211 at Arizona State University taught by Pereira in Fall 2015. Since its upload, it has received 19 views. For similar materials see Macroeconomic Principles in Economcs at Arizona State University.


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Date Created: 08/26/15
Economists are scientists they study the economy collect data and make observations 1 The Scientific Method observation theory and more observation a Economists study natural experiments offered by history b Events provide opportunity to study the effects of a key natural resource on the world s economies 2 The role of assumptions a Assumptions simplify the complex world and make it easier to understand b We can assume only the two countries in question exist and they only produce two goods that are also in question c Assumptions are based on different scenarios 3 Economic models a Models are built with assumptions b Models also help to simplify reality to better our understanding of it 4 Our first model The circular flow diagram a Models show general terms how the economy is organized and how participants in the economy interact with one another b Circular flow diagramvisual model of the economy that shows how dollars flow through markets among households and firms 5 Our second model production possibilities frontier a Production possibilities frontiergraph that shows the various combinations of output b Points on the production possibilities frontier represent efficient levels of production 6 Microeconomics and macroeconomics a Microeconomicshow households and firms make decisions and how they interact in specific markets b Macroeconomicsthe study of economywide phenomenon c each field has its own set of models d they rely on each other to be most effective 7 The economist as policy adviser a When economists explain the world they are scientists b When economists try to make it better they are policy advisers 8 Positive vs Normative analysis a Pollyminimum wage laws cause unemployment speaking like a scientist b Normthe government should raise the minimum wage speaking like a policy adviser c Positive statementsdescriptive make a claim about how the world is d Normative statementsprescriptive make a claim about how the world ought to be e Both statements are often intertwined in a person s beliefs 9 Economists in Washington a Tradeoffs are involved in most policy decisions b Council of Economic Advisersthree members and a staff of a few dozen economists c Economists at the Office of Management and Budget help formulate spending plans and regulatory policies d Economists at the Department of the Treasury help design tax policy e Economists at the Department of Labor analyze data on workers and those looking for work to help formulate labormarket policies f Economists at the Department of Justice help enforce the nation s antitrust laws 10 Why economists advice is not always followed a There are many factors in decision making b The president speaks to many different economists to decide which they all believe will be the best c Then they discuss the outcome and potential difficulties they will face 11 Why economists disagree a They may disagree about the validity of alternative positive theories about how the world works b May have different values and therefore different normative views about what government policy should aim to accomplish 12 Differences in scientificjudgements a Economics is still a young science and there is much to learn b Sometimes they disagree because they have different hunches about what will happen 13 Difference in values a Policies cannot be judged on scientific ground alone b They may have different values at stake c EXAMPLE income tax 14 Perception vs Reality a Many economists give advice about certain policies b Many of the public disagrees perhaps from lack of understanding 15 Summary a Economists try to address their subject with a scientist s objectivity Like all scientists they make appropriate assumptions and build simplified models to understand the world around them Two simple economic models are the circularflow diagram and the production possibilities frontier b The field of economics is divided into two subfields microeconomics and macroeconomics Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace Macroeconomists study the forces and trends that affect the economy as a whole c A positive statement is an assertion about how the world is A normative statement is an assertion about how the world ought to be When economists make normative statements they are acting more as policy advisers than as scientists Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgments or because of differences in values At other times economists are united in the advice they offer but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process


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