1Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Thinking LikeAn EconomistThinking LikeAn EconomistPrinciples of Macroeconomics Dr. Gabriel X. MartinezAve Maria UniversityChapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: StudyingEconomics: StudyingChoice In a World of ScarcityChoice In a World of ScarcityThe Scarcity PrincipleThe Scarcity Principle––Boundless wants cannot be satisfied with Boundless wants cannot be satisfied with limited resources. limited resources. ––Therefore, having more of one thing usually Therefore, having more of one thing usually means having less of another.means having less of another.––Because of scarcity we must make choices.Because of scarcity we must make choices.Chapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist33Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: StudyingEconomics: StudyingChoice In a World of ScarcityChoice In a World of ScarcityUnlimited Wants vs. Limited Resources Unlimited Wants vs. Limited Resources ScarcityChoicesChapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist44Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: StudyingEconomics: StudyingChoice In a World of ScarcityChoice In a World of ScarcityEconomics Economics ––The study of how people make choices under The study of how people make choices under conditions of scarcity and of the results of those conditions of scarcity and of the results of those choices for society.choices for society.Chapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist55Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: StudyingEconomics: StudyingChoice In a World of ScarcityChoice In a World of ScarcityEconomics Economics ––Alternatively, the study of how human being Alternatively, the study of how human being satisfy their wants and desires by satisfy their wants and desires by coordinatingcoordinatingthe available material resources, given the the available material resources, given the decisiondecision--making mechanisms, social customs, making mechanisms, social customs, and political realities of the society.and political realities of the society.Chapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist66Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Applying The CostApplying The Cost--Benefit Benefit PrinciplePrincipleThe Role of Economic ModelsThe Role of Economic Models––Economic models are abstract constructs Economic models are abstract constructs (simplified descriptions) that allow us to analyze (simplified descriptions) that allow us to analyze situations in a logical waysituations in a logical way––Other examples of abstract modelsOther examples of abstract modelsA computer model of climate changeA computer model of climate changeA road mapA road map2Chapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist77Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: Micro and MacroEconomics: Micro and MacroM M i i croeconomicscroeconomics––The study of individual choice under scarcity The study of individual choice under scarcity and its implications for the behavior of prices and its implications for the behavior of prices and quantities in individual markets.and quantities in individual markets.Chapter 1: Thinking Like an Chapter 1: Thinking Like an EconomistEconomist88Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Economics: Micro and MacroEconomics: Micro and MacroM M a a croeconomicscroeconomics––The study of the performance of national The study of the performance of national economies, and of the policies that economies, and of the policies that governments use to try to improve that governments use to try to improve that performance.performance.Because of scarcity, resources must be coordinated Because of scarcity, resources must be coordinated to satisfy wants. This coordination, on a grand scale, to satisfy wants. This coordination, on a grand scale, is what macroeconomics studies.is what macroeconomics studies.Macroeconomics:The Bird’s-Eye View of the EconomyMacroeconomics:The Bird’s-Eye View of the EconomyChapter 17: Macroeconomics:The Bird's-Eye View of the Economy10Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Introduction The Recent U.S. Recession In the U.S.: The economy almost came to a standstill in 2001. The number of people without jobs increased by 50% From one in every 25 Americans to one in every 16-17 Americans. Scores of Internet-based businesses collapsed.Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy11Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Real GDP Growth Rate-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%Jan-81Jan-83Jan-85Jan-87Jan-89Jan-91Jan-93Jan-95Jan-97Jan-99Jan-01Jan-03Jan-05Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy12Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Introduction The Recent U.S. Recession The cause? The Stock market bubble? Irrational exuberance? Capitalism? Poor economic planning?3Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy13Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Introduction The Recent U.S. Recession The response: Macroeconomic policies Government actions designed to affect the performance of the economy as a whole. The Fed cut interest rates dramatically. The Federal Government cut taxes and increased spending.Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy14Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Government Surplus % of GDP-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%Jan-81Jan-83Jan-85Jan-87Jan-89Jan-91Jan-93Jan-95Jan-97Jan-99Jan-01Jan-03Jan-05Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy15Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Introduction The Argentinian Collapse of 2001 The production of goods and services fell by nearly 20 percent between 1998 and 2002. About 1 of every 5 Argentinians