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    Macroeconomics I Essentials
    Macroeconomics I Essentials
    Macroeconomics I Essentials
    Ebook140 pages1 hour

    Macroeconomics I Essentials

    By Robert Rycroft

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    About this ebook

    REA’s Essentials provide quick and easy access to critical information in a variety of different fields, ranging from the most basic to the most advanced. As its name implies, these concise, comprehensive study guides summarize the essentials of the field covered. Essentials are helpful when preparing for exams, doing homework and will remain a lasting reference source for students, teachers, and professionals. Macroeconomics I includes economic problems, demand and supply, economic systems, the private sector, the public sector, gross national product, macroeconomic problems, and macroeconomic models.
    LanguageEnglish
    PublisherResearch & Education Association
    Release dateJan 1, 2013
    ISBN9780738670980
    Macroeconomics I Essentials
    Author

    Robert Rycroft

    Robert Rycroft was born at Bradford, the once famous woollen capital in the then West Riding of Yorkshire. His father was an Erk, an ordinary airman in the pre-WWII Royal Air Force, who served eight years, many in Mesopotamia. Robert joined the RAF in 1952 as a Trenchard's brat, aircraft apprentice; another Erk! He served seven years, several on Canberra bomber squadrons, finally on Bloodhound MK I guided missiles. He married in 1962, emigrated to Australia in 1974 and brought up three children, who subsequently married Australians. Robert, now 80 in 2016, a Christian, still lives at Normanton, West Yorkshire, UK. He has dual citizenship. His love of motorcycles, fast cars and aircraft, inspired Robert to write his seven novels in The Cartwright Saga series. Unsurprisingly, the main character is a hapless Erk called Ronald Cartwright, who runs foul of MI6 and the Australian ASIO. Sadly, after nearly fifty three years happily married, Robert’s wife died of cancer in 2015. Understandably, the final novel, “Erk in Confusion” has been delayed until 2016/17. Per ardua ad astra; the RAF motto!

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      Macroeconomics I Essentials - Robert Rycroft

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      CHAPTER 1

      INTRODUCTION TO ECONOMICS

      1.1 WHAT IS ECONOMICS?

      Economics—Economics is what economists do. This statement, attributed to the famous economist Jacob Viner, may in fact be the best description of the discipline available. What it says is that economics cannot be defined by a series of topics that all economists study. For example, contrary to widespread belief, economics is not the study of business. Topics in business certainly occupy the time of many economists, but there is much more to it. It is more accurate to say that economics is a particular way of looking at topics. It is a methodology for analyzing situations where human beings have to make choices from limited options. Consequently, it can be used to study such business-related issues as capital investment, pricing policy, and interest rates, but it can also be used to look at the bigger issues of inflation, unemployment, economic growth, and the non-economic issues of love, marriage, childbearing, and discrimination, to name but a few.

      Macroeconomics—Macroeconomics is the study of the economy as a whole. Some of the topics considered include inflation, unemployment, and economic growth.

      Microeconomics—Microeconomics is the study of the individual parts that make up the economy. The parts include households, business firms, and government agencies. Particular emphasis is placed on how these units make decisions and the consequences of these decisions.

      1.2 ECONOMIC ANALYSIS

      Economic Theory—An economic theory is an explanation of why certain economic phenomena occur. For example, there are theories explaining the rate of inflation, how many hours people choose to work, and the amount of goods and services the U.S. will import. Stripped down to essentials, a theory is a set of statements about cause and effect relationships in the economy.

      Models—A model is an abstract replica of reality, and is the formal statement of a theory. The best models retain the essence of the reality, but do away with extraneous details. Virtually all economic analysis is done by first constructing a model of the situation the economist wants to analyze. The reason for this is because human beings are incapable of fully understanding reality. It is too complex for the human mind. Models, because they avoid many of the messier details of reality, can be comprehended, but good models are always unrealistic.

      It would not be inaccurate to say that economists do not analyze the economy, they analyze models of the economy. Almost every prediction that an economist makes, e.g., the impact of changes in the money supply on interest rates, the effect of the unemployment rate on the rate of inflation, the effect of increased competition in an industry on profits, is based on a model.

      Models come in verbal, graphical, or mathematical form.

      Empirical Analysis—All models yield predictions about the economy. For example, a widely-held model predicts that increases in the rate of growth of the money supply will lead to higher inflation. In empirical analysis, economists compare predictions with the actual performance of the economy as measured by economic data. Good empirical analysis often requires mastery of sophisticated statistical and mathematical tools.

      Positive Economics—Positive economics is the analysis of what if. For example, positive economics tries to answer such questions as these: What will the effect be on the rate of inflation if the rate of growth of the money supply is raised by one percentage point? What will happen to hours of work of welfare recipients if welfare benefits are raised $500? What will the effect be on our trade balance if the exchange rate is devalued 5%? Many economists view positive economics as objective or scientific, and believe their special training gives them the expertise to draw conclusions about these types of issues.

      Normative Economics—Normative economics is the analysis of what should be. For example, normative economics tries to answer such questions as these: What inflation rate should our economy strive for? Should welfare recipients be expected to work? Is reducing our trade deficit a desirable thing? Normative economics is clearly a subjective area. There is nothing in an economist’s training that gives his or her opinions on these issues any more validity than anyone else’s.

      1.3 THE ECONOMIC WAY OF THINKING

      Economics analysis is characterized by an emphasis on certain fundamental concepts.

      Scarcity—Human wants and needs (for goods, services, leisure, etc.) exceed the ability of the economy to satisfy those wants and needs. This is true for the economy as a whole as well as each individual in the economy. In other words, there is never enough to go around. Individuals never have enough money to buy all they want. Business firms cannot pay completely satisfactory wages without cutting into profits, and vice-versa. Government never has enough money to fund all worthwhile projects. The concept of scarcity is discussed again in Section 2.1.

      Opportunity Cost—The reality of scarcity implies

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