Welcome to ECO 212

Macroeconomics in the Global Economy
./.

http://www.statesmanjournal.com/article/20110822/OPINION/108220312/Fact-Check-Recession-culprit-high-US-debt

http://www.youtube.com/watch?v=VVp8UGjECt4

Brief Outline:

 

Introduction to ECO 212

Syllabus and Webpage:

 

 

 

 

 

OUTLINE -- CHAPTER 1
Limits, Alternatives, and Choices:
An introduction to Economics and the 5Es
 

I. Introduction to Macroeconomics in the Global Economy - Day 1

A. ACTIVITY:

QUESTION:

Should the United States have free trade with Mexico?

Why or why not?

QUESTION:

Assume that a hurricane has struck the coast of Florida causing massive destruction. As a result, the prices of many products like hotel rooms, water, plywood, etc. increase significantly. For example, let's say the price of plywood increases from a price of $10 a sheet before the hurricane to $30 a sheet after the hurricane.

What should the government do?

A. Pass a law to make these "price-gouging" increases illegal returning the price to $ 10

B. Nothing. Let the price of plywood rise to $30 or more

C. Something else?

 

 

 

 

 

 

 

B. Why "the Global Economy"?

Welcome to ECO 212

Macroeconomics in the Global Economy

1. Who has taken a MICROeconomics course (ECO 211)?

  • no prerequisite
  • need to review of microeconomic principles
  • we'll do so, but in an international context

2. The three issues of Macroeconomics (ECO 212)

a. Unemployment (UE)
b. Inflation (IN)
c. Economic Growth (EG)

 3. Global Economics is "in the news" BUT . . .

Dobbs: New Congress must show courage [http://www.cnn.com/2006/US/11/28/Dobbs.Nov29/index.html]

Lou Dobbs, former CNN News commentator, says:

"We've lost three million manufacturing jobs as a result of these so-called free trade agreements that enable corporate America to export plants, production and jobs to cheap foreign labor markets."

 

Then read the following quotes taken from our textbook:

"The long-run impact of tariffs (restricting trade) is not an increase in employment . . . (p. 489) "

" tariffs also reduce efficiency and the world's real output" (p. 487)

 

4. Structural Adjustment and Globalization
What is Structural Adjustment?

 

C. Video: Korea vs. Sri Lanka
While watching the video look for answers to these questions:

1. What are they doing? (POLICIES)

2. Why are they doing it? (BENEFITS)

3. What negative effects might arise? (COSTS)

Available online at:

  • Click on: http://www.learner.org/resources/series86.html
  • Scroll down to:
    • 10. Developing Countries - How these nations have been helped or hurt by the rapid growth since WWII. Case studies: comparing South Korea and Sri Lanka; aid vs. trade in Tanzania.
  • Click on (A free registration is required for first time users)
  • Then slide the timer to minute 7:45 for the eight minute South Korea vs. Sri Lanka case study

D. News Articles:

II. Structural Adjustment and Globalization

A. Short Introduction to Structural Adjustment Programs

B. Economic Systems

C. Structural Adjustment Policies
VIDEO: Poland

  • Privatization
  • Promotion of Competition
  • Reduced Role of Government
  • Removing Price Controls
  • Freer Trade and Convertible Currency
  • Foreign Investment
  • Other

Available online at:

  • Click on: http://www.learner.org/resources/series86.html
  • Scroll down to:
    • 11. Economies in Transition: Transforming former Communist countries into market economies. Case studies: state industries vs. private entrepreneurs in Russia; the success of Poland’s “shock therapy.”
  • Click on (A free registration is required for first time users)
  • Then slide the timer to minute 27:25 for the eight minute the success of Poland’s “shock therapy case study

D. Goals of SAPs

  • Maximize society's satisfaction = improve the standard of living

 

  • Macroeconomic Goals:
    • full employment
    • low inflation
    • economic growth

E. Problems with SAPs:

  • initial inflation and unemployment
  • initial falling output and living standards
  • inequality and social costs - some people are worse off

 

 

II. What Is Economics?

A. Need to know basic economic principles to understand WHY the world is moving toward Structural Adjustment or Globalization

B. DEFINITION:

1. MARK'S DEFINITION OF ECONOMICS:

2. TEXTBOOK'S DEFINITION : Economics is the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

  • What I like: The emphasis on making CHOICES
  • What is unclear: What does "SCARCITY" mean?

 

  • GOAL OF ECONOMICS: BEST CHOICES = Maximize Satisfaction !

 

3. OUR DEFINITION: Economics is the social science that studies how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants

C. The definition has 4 parts:

  1. social science
  2. choice
  3. scarcity
  4. maximizing satisfaction

III. "Social Science" -- Using theories

A. based on facts
B. simplifications
C. generalizations
D. abstractions
E. ceteris paribus

IV. Why Study Economics?

V. The Economic Perspective: Scarcity and Choice -- the 5Es of Economics

A. Scarcity -- Limited resources and Unlimited wants
  • The reason why we have to make choices
  • economic definitions are sometimes different - define "scarcity"
  • "erskinite"

B. Unlimited Wants and the necessity of choice

C. Solving the Economizing Problem: Options for Dealing with Scarcity

1. economic growth ( the first "E")
2. reducing wants
3. use existing resources wisely = maximizing satisfaction

 

1. economic growth ( the first "E")

a. DEFINITION: an increase in the ABILITY to produce goods and services
[This is NOT the same as the common definition: an increase in output]

b. caused by:

  1. MORE resources
  2. better resources
  3. better technology

c. textbook: "An outward shift in the production possibilities curve which results from an increase in resource quantity or quality or an improvement in technology" (more on this later)

d. Economic growth is one of the three issues of Macroeconomics --We'll discuss economic growth in more detail later in this chapter, in unit 2, and throughout the semester.

2. reducing wants

3. use existing resources wisely = maximizing satisfaction

VI. Maximizing Satisfaction -- Four More Es

 

F. Review

1. What is Structural Adjustment?

2. Why are they doing it?

a. What is Economics?

b. What is the GOAL?

c. What are the 5Es?

d. How does EACH of the 5Es reduce scarcity and achieve this goal?

3. Compare market economies and command economies as to how well they achieve the 5Es.

VII. Limited Resources: The Four Factors of Production

A. What is a resource?

B. Types of Resources

1. Land
a. examples
b. definition

2. Capital

a. examples
b. definition

3. Labor

a. examples
b. definition

4. Entrepreneurial Ability

a. examples
b. definition

C. Resource Quiz (yellow page)

D. Resources and Resource Payments

1. land -- rent
2. capital -- interest
3. labor -- wages
4. entrepreneurial ability -- profits or losses

VIII. Economic Models

A. Demonstrating economic concepts
B. Line Graphs
1. construction
2. inverse and direct relationships
3. slope
a. linear (straight) graph
b. nonlinear (bent) graph

 

IX. The Economizing Problem: Making Choices 

 

  • What does the budget line show?
    • We must make choices
    • Some combinations are unattainable
    • There are tradeoffs - called opportunity costs
      • to get one more DVD you have to tradeoff (give up) how many books?
      • the opportunity cost of one book is how much of a DVD?

       

      • opportunity costs = slope
        • slope = rise/run = change in # DVDs / change in the # books

       

    • What happens if income or prices change change?
      (be able to make a new table and budget line graph)
      • income decreases ($60 gift card)
      • income increases ($240 gift card)
      • price of DVD decreases to $10 (income stays at $120)
      • price of DVD increases $30 (income stays at = $120)
      • price of books decreases to $5
      • price of books increases to $20

 

B. The Necessity of Choice -- Production Possibilities

1. Society's Economizing Problem -- The Necessity of Choice
The choices necessitated because society’s material wants for goods and services are unlimited but the resources available to satisfy these wants are limited.

a. Unlimited Wants
b. Limited resources

2. Production Possibilities -- Demonstrating the Necessity of Choice

The Production Possibilities Curve can be use to illustrate several important economic concepts:

  • we must make choices
  • choices have opportunity costs
  • the law of increasing costs
  • the effect of unemployment
  • the effect of productive inefficiency
  • the effect of economic growth
  • how present choices affect future possibilities
  • it does NOT show the optimum product mix (allocative efficiency)
a. Production Possibilities Table
1) shows the MAXIMUM POSSIBLE LEVELS OF PRODUCTION given the assumptions
2) assumptions
  • fixed resources
  • fixed technology
  • productive efficiency
  • full employment
  • only two goods

3) the necessity of choice -- Unattainable combinations

b. Production Possibilities Curve

1) the necessity of choice -- Unattainable combinations
2) opportunity costs
a) ALL costs in economics are opportunity costs
b) definition
The amount of other products which must be forgone or sacrificed to produce a unit of a product.

c) examples

  • op. cost of coming to class today
  • op. cost of attending NIU
  • op. cost of a free trip to Europe
  • What is the op. cost of a human life?

d) calculating opportunity costs

3) law of increasing costs

a) definition
As the production of a good increases the opportunity cost of producing an additional unit rises.

b) shape of the PPC -- concave
c) rationale

4) unemployment
5) productive inefficiency

6) economic growth (Macro Issue)

a) Two (Three) Definitions
  • Increasing our ABILITY to Produce = INCREASING OUR POTENTIAL (Ch. 1 / 5Es Def.)
  • Increasing Output = ACHIEVING OUR POTENTIAL (Ch. 8 Def. ?)
    • graphically
    • reduce UE
    • reduce. prod ineff.
  • GDP per capita (Ch. 8 Def.)

b) a shrinking PPC?
c) non-proportional growth

7) present choices, future possibilities
8) optimum product mix? (allocative efficiency?)

3. Real World Applications

a. The economics of War (p. 14)
  • defense good, civilian goods and the "war on terror"
  • Marginal Benefit and Marginal Costs
  • 9/11 increase the MB of defense goods

b. discrimination
c. growth: Japan vs. U.S.
d. international trade

C The Necessity of Choice -- Marginal Analysis: How to make choices

p. 5, Fast Food Lines (box)
p. 5, "Marginal Analysis: Benefits and Costs"
pp. 13-14, "Optimal Allocation" (especially fig 1.3),
p. 14 "The Economics of War" (box)

1. Benefit-Cost Analysis
"the economic perspective")

a. definition
the selection of ALL possible alternatives where the marginal benefits are greater than the marginal cost

select all where: MB > MC
up to where: MB = MC
but never where: MB < MC

TEXTBOOK: Marginal Analysis: the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making .

b. marginal benefits and marginal costs

marginal benefit

The extra (additional) benefit of consuming one more unit of some good or service; the change in total benefit when one more unit is consumed.

marginal cost

The extra (additional) cost of producing one more unit of output; equal to the change in total cost divided by the change in output (and in the short run to the change in total variable cost divided by the change in output).

 

c. Marginal Benefit = Marginal Cost Rule

  • The point at which the size or scope of production (or any decision) is optimized.
  • The activity, scope, or output of a project (or decision) should be increased until it reaches this point - or comes very close to it.
  • This point will yield the maximum net benefit to society.
  • If marginal benefit exceeds marginal cost, then the project is too modest, and could be increased thereby increasing the net benefit to society;
  • however, if the marginal cost exceeds the marginal benefit, then the project will decrease the net benefit to society and should be decreased in scope.
  • For example, if the cost of a proposed government program exceeds its benefits, then it would be unwise to undertake it, but if the benefits exceed the cost, then it would be uneconomical, or "wasteful" not to spend on that government program.

d. ignore fixed or sunk costs

a fixed or sunk cost is any cost that does not change as a result of the decision

TEXTBOOK: A fixed cost is any cost which in total does not change when the firm changes its output; the cost of fixed resources.

e. examples

1) How many guards should be hired?
2) How many bridges should be built?
3) Should I go to class today?
4) should I attend NIU full time?
5) Should I drive fast?
6) The economics of War (p. 14)
defense good, civilian goods and the "war on terror"

Marginal Benefit and Marginal Costs

9/11 increase the MB of defense goods

7) Sunk costs are irrelevant in decision making

 
  • buy tickets to football game but wake up with the flu - should you go?
  • you buy "totally mushy" apples, should you eat them?
  • already paid a nonrefundable annual lease for a business - should you move to a more profitable location
  • $1 million spent on R&D for a new product that few people want - should you produce it anyway even at a loss?
    • Pfizer's insulin inhaler
    • New Coke
    • McLean
  • you already bought the ring - should you therefore marry him/her?

8) Others

Think of a decision that you currently have to make. What are the marginal benefits and the marginal costs? Are there any sunk costs that do not matter?

f. GRAPHICALLY

REVIEW

End-of-chapter questions Chapter 1, #9
Specify and explain the typical shapes of the marginal-benefit and marginal-cost curves. How are these curves used to determine the optimal allocation of resources to a particular product. If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product? Explain.

ANSWER: The marginal benefit curve is downward sloping, MB falls as more of a product is consumed because additional units of a good yield less satisfaction than previous units. The marginal cost curve is upward sloping, MC increases as more of a product is produced since additional units require the use of increasingly unsuitable resource. The optimal amount of a particular product occurs where MB equals MC. If MC exceeds MB, fewer resources should be allocated to this use. The resources are more valuable in some alternative use (as reflected in the higher MC) than in this use (as reflected in the lower MB).

 

Multiple Choice Problems

The following data are for a series of increasingly extensive flood control projects:

Total cost
per year
MC

Total benefit
per year

MB

No project

$ 0
------------

$ 0
------------

Plan A

levees

10,000

20,000

Plan B

small reservoir

24,000

34,000

Plan C

medium reservoir

44,000

42,000

Plan D

large reservoir

72,000

40,000

1. Refer to the above data. For Plan D marginal costs and marginal benefits are:

A. $72,000 and $64,000 respectively.

B. $28,000 and $2,000 respectively.

C. $24,000 and $18,000 respectively.

D. $16,000 and $28,000 respectively.

2. Refer to the above data. On the basis of benefit-cost (marginal) analysis government should:

A. undertake Plan A.

B. undertake Plan B.

C. undertake Plan C.

D. undertake Plan D.

3. Plan C above entails:

A. marginal benefits in excess of marginal costs.

B. fewer spillovers than either Plan A or Plan B.

C. an overallocation (too much) of resources to flood control

D. an underallocation (too little) of resources to flood control.

 

(See answers below)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANSWERS:

Total cost
per year
MC

Total benefit
per year

MB

No project

$ 0
--

$ 0
--

Plan A

levees

10,000

10,000

20,000

20,000

Plan B

small reservoir

24,000

14,000

34,000

14,000

Plan C

medium reservoir

44,000

20,000

42,000

8,000

Plan D

large reservoir

72,000

28,000

40,000

2,000

1. For Plan D marginal costs and marginal benefits are:

B. $28,000 and $2,000 respectively.
Be sure that you can calculate MB and MC. If you need help ask on the Discussion Board

 

2. Refer to the above data. On the basis of benefit-cost (marginal) analysis government should:

B. undertake Plan B.
Do all options as long as the MB are greater then the MC (MB>MC)

 

3. Plan C above entails:

C. an overallocation (too much) of resources to flood control
For plan C the MB are less than the MC (MB<MC). this means tat too many resources are being used on these flood control projects. To say this another way, IF the MB are less than the MC it means that you have other uses for these resources that will give you more benefits. Remember, the MC of any decision is the benefits of other alternatives that you are not doing.

 

D. The Circular Flow Model

The flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

1. Two Markets
a. product market

A market in which products are sold by firms and bought by households.

1) how much to buy
2) how much to produce

b. resource market

A market in which households sell and firms buy resources or the services of resources.

1) how many to hire
2) how much we earn

2. Two Flows

a. real flow
b. money flow

3. Reversal of Roles
4. Limitations