Elements of Economics (Macroeconomics)

(SOEC 2523)

BERNARD NYARKO BOAHENE024 448 49 83

kwasinyarkob@gmail.com

2002-02-02

Course Requirements

• Mid-sem exams• Final exam• Assignments and attendance• Case studies

Lecture 1, 2009-02-02 2

Course Outline

• Macro issues and measurement• Basic model of the determination of GDP in

the short-run• GDP in an open economy with government• GDP and the price level in short-, long-run• Role of money in macroeconomics• Balance of payments and exchange rates• Macroeconomic policy in a n open economy

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AGENDA

• Economic Advice - The difference between positive and normative statements

• How economists set out their theories

• How economic data are handled• How economic relationships are

represented in diagrams

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Introduction• What make some countries grow richer while others seem to

get poorer?• Why do we sometimes have recessions?• When should the government try to influence markets?• What are the costs and benefits of globalization?• Will some new technology eliminate many jobs?

• In order to get a handle on such big issues, economists have developed ways of

• setting out and testing their theories• using what they have learned in order to provide

advice on how things could be improved

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• We start by discussing an important distinction relating to the types of statements that are used in giving advice

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Positive and Normative Statements

• Economists give advice on wide variety of topics

• Two broad types of statements–POSITIVE AND NORMATIVE

STATEMENTS

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Normative Statement

• NS depends on value judgements• NS involve issues of personal

opinions; and• Cannot be settled by recourse

to facts

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Positive Statements

• Do not involve value judgements• They are statements about–What is–What was or–What will be

• They are statements about facts

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Positive and Normative Statement

• Distinguishing what is true from what we would like to be, or what we feel ought to be, depends to a great extent on being able to distinguish between positive and normative statements

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Positive and Normative Statement

Positive Normative

• Higher interest rates cause people to save more

• High income tax rates discourage effort

• High taxes on cigarettes discourage smoking

• Road use charges would increase traffic

• People are more worried about inflation than unemployment

• The burning of fossil fuels is causing global warming

• People should save more• Governments should tax the rich to

help the poor• Smoking should be discouraged• The tax system should be used to

reduce traffic• Technical change is a bad thing

because it puts some people out of work

• Governments should do more to reduce carbon emissions in order to save the planet from global warming

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Positive and Normative Statements

• To test the ‘positiveness’/’normativeness’ of a statement:– Is the statement only about actual or

alleged facts?

– Are value judgements necessary to assess the truth of the statement?

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AGENDA

• How economists set out their theories

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Economic Theorizing• Why has the computer and internet

revolution of the last few decades not led to an increase in the trend growth rate of most major economies?

• Does globalisation help to raise living standards in the developing countries?

• To address these questions, economists have developed an approach that involves developing theories and building models

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THEORIES

• Theories are constructed to explain things• E.g. what determines the number of eggs

sold at the Makola market in a particular week? (demand theory)

• Theories built around– Definitions (variables)– Assumptions (motives, physical

relationships, conditions of application, direction of causation)

– Predictions (propositions deduced)

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MODELS• Models (economic models) have several

different but related meanings– ‘Model’ may be synonymous to ‘theories’– ‘Model’ may mean a specific quantitative

formulation of a theory– Specific numbers attached to maths relationships defined by

the theory

– ‘Model’ may refer to an application of a general theory in a specific context

– E.g. consumer demand of egg in the Accra market

– ‘Model’ may be an illustrative abstraction, not meant to be elaborate enough to be tested

– E.g. the circular flow of income

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Economic Theorizing• Evidence – economists make use of empirical observation to

test a specific prediction of some theory• Tests – theories tested by confronting its predictions

with evidence

• Economists still disagree after all these processes. Why?– Different benchmarks, short- or long-term

consequences, ignorance of economists, different values of economists, and media bias

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Agenda

• Economic data

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Economic Data• Economists seek to explain observations

made of the real world• E.g. why did the price of tomatoes rise in certain years

even though the tomato crop increased

• We will be aware of this issue only if we have numbers for the tomato crop and its price

• Real world observations are also needed to test the predictions of economic theories

• E.g. higher savings resulting from income tax cuts

• To test the predictions there is the need to collect data

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Displaying Data• Tables

• Graph– Cross-sectional – different obs on one variable all

taken in different places at the same time– Time series – obs on one variable at successive points

in time– Scatter diagrams – to show relationship between two

different variables

• Index– (Relative or absolute movements)

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TABLEPrice of cocoa and coffee (average price in each quarter, US cents per kg)

Period Cocoa Coffee

2001 Q1

2001 Q2

2001 Q3

2001 Q4

2002 Q2

100.4

104.5

100.8

121.8

149.0

146.7

146.4

129.6

126.4

136.6

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INDEX

Period Cocoa Coffee Index of coffee prices

2001 Q1

2001 Q2

2001 Q3

2001 Q4

2002 Q2

100.4

104.5

100.8

121.8

149.0

146.7

146.4

129.6

126.4

136.6

(146.7/146.7)*100=100

(146.4/146.7)*100=99.8

(129.6/146.7)*100=88.4

(126.4/146.7)*100=86.2

(136.6/146.7)*100=93.1

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GRAPH

Unemployment for figures for four countries, September 2005

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AGENDA

• Graphing economic relationships

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Graphing Economic Relationships

• Theories are built on assumptions about relationships between variables

• How are such relationships expressed• When one variable is related to another

in such a way that to every value of one variable, there is only on possible value of the second variable, we say that the second variable is the function of the first

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Graphing Economic Relationships

• Functional relationship can be expressed in – words,

– E.g. when income is zero, the family will spend GHC800 a year (either by borrowing or consuming past savings), and for every GHC1 of income that it obtains it will increase its spending by 80pesewas

– numerical schedule, – mathematical equation– a graph.

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Graphing Economic Relationships

• From graph we obtain slopes– Straight line slope– Nonlinear relationships– Maxima and minima

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