Issues and Approaches in Economics

1. Issues and Approaches in Economics

2. Economic Issues I • Equity versus Efficiency • Worry about getting the most out of resources (efficiency) • Unemployment, inflation • GDP • Worry about giving equality in consumption (equity) • Safety net (welfare) • Access to health care

3. Economic Issues II • Normative vs Positive Economics • Normative Economics: Using economics to determine how things ought to be. • Evaluate economy on its outcomes • Evaluating policies on the desirability of the outcome • Positive Economics: Using economics to understand how things are. • Seeing how the economy works • Determining the effects of policies

4. Economic Issues Application I • Are Equity and Efficiency always inconsistent? • Evaluate unemployment insurance for both equity and efficiency. • Would national health insurance increase efficiency? • Would national health insurance increase equity?

5. Economic Issues Application II • How do normative and positive economics differ? • What important issues would we consider if we evaluate national health insurance normatively? • What important issues would we consider if we evaluate national health insurance positively?

6. Four Key Issues in Macro • What is the productive capacity of the economy? • Are we achieving our economic potential? • Are we ensuring a stable economic system? • How is it being distributed? • Through this class we will address all of these

7. Some Key Statistics I

8. Some Key Statistics II

9. Economic Modeling • Representation of reality • Doesn’t try to capture full reality • Focuses on salient and important factors • Graphs provide intuition • We’ll use simple graphs to understand concepts • Math provides exactness • We’ll use simple mathematical models to understand more complex interactions

10. Key Elements of Models • Assumptions – things taken as true, which provide the underlying structure • Variables – values that can change • Exogenous variables are determined outside the model. They take on assumed values, which can change. Policy is often represented by changes in these values • Endogenous variables are determined within the model. They are what we are trying to find

11. Key Elements to Models (cont) • Identities – an equality taken to be true (a type of assumption, e.g., that NI=NP) • Equations and parameters – define the behavioral relationships between variables • Equations tell how the variables interact • Parameters measure the strength of these relationship

12. Graphs I

13. Graphs II

14. Graphs III

15. Economic Participants I

16. Economic Participants II

17. Measuring Efficiency • Use the Production Possibility Curve (PPC) • Also known as the Production Possibility Frontier (PPF) • Separates the feasible set of goods that an economy can produce from the infeasible • Indicates efficiency, choice and growth • Shows opportunity costs

18. An Example PPC I B and C are efficient A is inefficient D is infeasible

19. An Example PPC II The opportunity cost of Increasing investment from IB to IC is GB-GC, the amount of other goods given up. So the opportunity cost of investment goods is the slope of the PPC.

20. Economic Growth and the PPC Other goods Economic growth is shown by the PPC shifting out, away from the origin. It indicates that more of both goods can be produced, either by new technology or more resources. Investment goods

21. Summary of the PPC • Shows the possible consumption combinations exist in the economy. • Shows the trade-offs are in terms of the consumption of other goods if the consumption of one good is increased (opportunity costs). • By the point chosen, shows the type of decisions the economy as a whole is making about what to consume, who will benefit, and what it means for distribution and economic growth. • Whether the economy is efficient, or is it possible to increase output of one or more goods without decreasing some other good. • Over time, how it grows, how fast is the economy growing.

22. Discussion questions • How does the war in Iraq affect the choice of production? How would you characterize it on a PPC? • Does possible terrorism and the war affect economic growth? How? • When the government indicates that unemployment is falling, is that a sign of economic growth? • What key statistic is a better measure of economic growth?