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Week 1 chapter notes

6 Pages

Economics for Management Studies
Course Code
Jack Parkinson

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Chapter 1 The Science of Macroeconomics Notes 1.1 What Macroeconomists Study N macroeconomics the study of the economy as a whole N because the state of the economy affects everyone, macroeconomic issues play a central role in national political debates N voters are keenly aware of how economy is doing, and they know that government policy can affect economy in powerful ways N as a result, the popularity of the government often rises when the economy is doing well and falls when it is doing poorly N macroeconomic issues are also at the center of world politics N although the job of making economic policy belongs to world leaders, the job of explaining how the economy as a whole works falls to macroeconomists due to which macroeconomists collect data on incomes, prices, unemployment, and many other variables from different time periods and different countries N then they attempt to formulate general theories that help to explain these data N macroeconomists observe that economies differ from one another and that they change over time N these observations provide both the motivation for developing macroeconomic theories and the data for testing them N since the Canadian economy is a mixture of markets and government policy involvement, this knowledge is useful both for explaining economic events and for formulating economic policy N macroeconomic history is not a simple story, but it provides a rich motivation for macroeconomic theory N although the basic principles of macroeconomics do not change from decade to decade, the macroeconomist must apply these principles with flexibility and creativity to meet changing circumstances Case Study: The Historical Performance of the Canadian Economy N economists use many types of data to measure the performance of an economy N 3 macroeconomic variables are particularly important: real GDP, the inflation rate, and the unemployment rate N real GDP measures the total income of everyone in the economy (adjusted for the level of prices) N inflation rate measures how quickly prices are rising N unemployment rate measures the fraction of the labour force that is out of work N macroeconomists study how these variables are determined, why they change over time, and how they interact with one another N recession a sustained period of falling prices N depression a very severe recession N deflation a decrease in the overall level of prices 1.2 How Economists Think Theory as Model Building N model a simplified representation of relation, often using diagrams or equations, that shows how these variables interact N economists build their toy economies to help explain economic variables, such as GDP, inflation, and unemployment N economic models illustrate, often in mathematical terms, the relationships among the variables N models have two kinds of variables: endogenous variables and exogenous variables N endogenous variable variable that is explained by particular model; variable whose value is determined by models solution N exogenous variable variable that particular model takes as given; variable whose value is independent of models solution N in other words, exogenous variables come from outside the model and serve as the models input, whereas endogenous variables are determined inside the model and are the models output N the art in economics is in judging where a simplifying assumption clarifies thinking and when it misleads N simplification is necessary part of useful model: any model constructed to be completely realistic would be too complicated N yet models lead to incorrect conclusions if they assume away features of the economy that are crucial to the issue at hand The Use of Multiple Models N macroeconomists study many facets of the economy: influence of fiscal policy on economic growth, impact of employment insurance on unemployment rate, effect of inflation on interest rates, and influence of trade policy on exchange rate N although economists use models to address all these issues, no single model can answer all questions N economist use different models to explain different economic phenomena N a model is only as good as its assumptions and an assumption that is useful for some purposes may be misleading for others N when using a model to address a question, the economist must keep in mind the underlying assumptions and judge whether these are reasonable for studying the matter at hand Prices: Flexible versus Sticky N economists normally presume that price moves quickly to bring quantity supplied and quantity demanded into balance N market-clearing model (MCM) a model that assumes the prices freely adjust to equilibrate supply and demand N for answering most questions, economists use market-clearing models N yet this assumption of continuous market is not entirely realistic N for markets to clear continuously, prices must adjust instantly to change in supply and demand N although market-clearing models assume that all wages and prices are flexible, in real world some wages and prices are sticky N flexible prices prices that adjust quickly to equilibrate supply and demand N sticky prices prices that adjust sluggishly and, therefore, do not always equilibrate supply and demand N the apparent stickiness of prices does not necessarily make market-clearing models useless www.notesolution.com
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