Macro Economics

positive statement examples

"In some circumstances, if taxes are lowered, government revenues actually increase." "When the government increases taxes, rates of tax evasion increase"

normative statement examples

"taxes are too high" "it is immoral for a government to redistribute money from one person to another"

the circular-flow diagram

- Visual model of the economy - Shows how dollars flow through markets among HOUSEHOLDS and FIRMS - Markets for goods and services: Firms = seller ; Household = buyers - Markets for factors of production: Firms = buyers ; Household = sellers

production possibilities frontier

- a graph - combo of output that the economy can possibly produce - given the factors of production and production technology - points outside the frontier are not feasible given the economy's resources. - the economy can produce any combo on or inside the frontier - if the point is out, the point is infeasible - if the point is inside the shade or below the line, it is inefficient - if the point is on the line, it is efficient

the shape of the PPF

-the PPF could be a straight line (has constant slope and constant opportunity cost) -if its bow shaped, the slope can vary which means the opportunity cost can vary

the PPF represents

-tradeoff and opp cost -efficiency and inefficiency - - the PPF would be bow shaped when there is some other resource or mix of resources with varying opportunity cost

Role of Assumption

1. Makes it easier to understand 2. The art in scientific thinking: deciding which assumptions to make

1. Positive 2. Positive 3. Normative 4. Normative 5. Positive

Classify each of the following statements as positive or normative. 1. Society faces a short-run tradeoff between inflation and unemployment. 2. A reduction in the rate of money growth will reduce the rate of inflation. 3. The Federal Reserve should reduce the rate of money growth. 4. Society ought to require welfare recipients to look for jobs. 5. Lower tax rates encourage more work and more saving.

1. Microeconomics 2. Microeconomics 3. Macroeconomics 4. Microeconomics 5. Macroeconomics

Classify the following topics as relating to microeconomics or macroeconomics. 1. A family's decision about how much income to save. 2. The effect of government regulations on auto emissions. 3. The impact of higher national saving on economic growth. 4. A firm's decision about how many workers to hire. 5. The relationship between the inflation rate and changes in the quantity of money.

production plans

combinations of two goods that an economy can produce given its resources and technology

Gross Domestic Product

measures total output of the economy this is also the total income of everyone in the economy and the GDP also measures total expenditure on the economy's output of goods and services (output equals income equals expenditure)

positive statement example

prices rise when the government increases the quantity of money

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer to determine who has the comparative advantage in computers, you have to determine the opp cost.

absolute advantage

the ability to produce a good using fewer inputs than another country/producer (The US has an absolute advantage in wheat: it uses 10 labor hours in wheat production vs 25 in Japan) **a misleading indicator for why the country should specialize in a certain good (measures the cost of a good in terms of the inputs)

normative statement examples

the government should print less money a tax cut is needed to stimulate the economy (another value judgement)

factors of production

the inputs that firms produce using goods and services, such as labor, land, and capital (buildings and machines) (circular-flow diagram)

The GDP is...

the market value of all final goods and services produced within a country in a given period of time (goods are valued at their market prices so: 1. all goods measured in the same units (ex dollars in the US) 2. things that dont have a market value are excluded (ex housework you do for yourself) 3. economists are relatively neutral about the value of things, just let the market decide)

macroeconomics

the study of economy-wide phenomena (might study the effects of borrowing by the federal government, the changes over time in the economy's rate of unemployment, or alternative policies to promote growth in national living standards)

microeconomics

the study of how households and firms make decisions and how they interact with specific markets (might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry)

why economists disagree

they try to be a scientist or a policy advisor often give conflicting advice

two measures of the cost of a good

two countries can gain from trade when each country specializes in the good it produces at lowest cost 1. absolute advatage 2. comparative advantage

Intermediate goods

used as components or ingredients in the production of other goods

markets for factors of production

where firms are buyers and households are sellers (circular-flow diagram)

market for goods and services

where households are buyers and firms are sellers (circular-flow diagram)

feasible but not efficent

A point inside the production possibilities frontier is

move the economy along the production possibilities frontier

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would _________________________________________

normative statements

As POLICY ADVISORS, economists make _____________ ________________: **opinion based - attempt to prescribe how the world should be - prescriptive ("The government should raise the minimum wage")

positive statments

As scientists, economists make _________________ ___________: - attempt to describe the world as it is - descriptive - confirm or refute by examining evidence ("Minimum-wage laws cause unemployment.")

three parts of government that rely on advice from economists

Economists at the Department of the Treasury help design tax policy. Economists at the Department of Labor analyze data on workers and those looking for work to help formulate labor-market policies. Economists at the Department of Justice help enforce the nation's antitrust laws.

Why do economists so often appear to give conflicting advice to policymakers?

Economists may disagree about the validity of alternative positive theories of how the world works. (differences in scientific judgements) Economists may have different values and therefore different normative views about what government policy should aim to accomplish. (differences in values)

different skills

PPF is bow shaped when different workers have __________ _____________.

circular-flow example

STARBUCKS COFFEE 1. $ begins at household 2. Spend dollar at starbucks 3. dollar becomes starbucks revenue 4. firm uses dollar to buy inputs in the markets for the factors of production (starbucks uses it to pay workers or pay for rent space) 5. Dollar enters another household and cycle begins again

A

Which of the following is positive, rather than a normative, statement? A. Law X will reduce national income. B. Law X is a good piece of legislation. C. Congress ought to pass the law X. D. The President should veto law X.

households

___________ own the factors of production and consume all of the goods and services that the firm produce. (circular-flow diagram)

trade-offs

____________ are involved in most policy decisions

positive, normative

_____________ views about how the world works affect _________ views about what policies are desirable

the production posibilites frontier

_______________________ is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output. (cars and computers diagram)

Higher productivity would be reflected in

a shift up of the PPF. ( in wheat vs. computers, the US allocates resources in wheat, Japan in computers)

economic model

an ___________ ___________ is a simplified representation of some aspect of the economy.

Final goods in GDP

intended for the end user in GDP

gains from trade

both countries are consuming more of both goods the economist called it the "miracle of trade" (note that no country became more productive)

comparative advantage

gains from trade arise from comparative advantage (differences in opp costs)