1 Introduction to Macroeconomics 12 9 13 Methodology of Economics According to Wikipedia Economic methodology is the study of methods especially the scientific method in relation to economics including principles underlying economic reasoning Economic Principles are generalizations based on observations For strong results the empirical base must be expanded Large statistics must be used to give the mean Economic policies are used to fix economic problems There are two types of economic policies 1 Fiscal policies Created by the Federal Government 2 Monetary policies Created by the Federal Reserve Econometric Models are mathematical models that describe the relationship between two economic variables It tells us which of these variables is the most important when it comes to consumption Relationship between Income and Consumption as gathered info from class Income weekly 0 100 200 400 Consumption weekly 50 90 150 225 Hence there is a directly proportional relationship between income and consumption The above relationship can only be taken as correct with the ceteris paribus assumption Ceteris Paribus is a Latin term which means All other things remaining equal Hence income and consumption will have a direct relationship when all the other things remain equal Different things consumption is based on other than income 1 Real and Financial Assets 2 Members of household Inflation 3 4 Medical 5 Level of debt 2 Economic Policies and their Goals When economists apply policies they do this to try and achieve certain goals The most important goals are 1 Economic Growth Achieving economic growth is the primary goal of any policy The economists would want the value of the commodities to increase as much as possible The net value of all goods and services at the end of the year is termed as Gross Domestic Product or GDP The GDP of USA is 3 whilst that of China is 10 11 per year 2 Low Unemployment We desire for low unemployment and not 0 unemployment because that is impossible due to frictional unemployment Hence as low as possible Even when we draw the PPF we take the lowest possible level of unemployment and not 0 Hence the economy can be on the PPF and not have 0 unemployment 3 Low Inflation 2 4 inflation is desirable inflation Anything above that is undesirable Inflation defined in the populace sense as if you have 6 consecutive months or 2 consecutive quarters of negative growth it is called a recession 4 Efficiency When the least amount of resources is used to produce the maximum amount of output Hence maximum benefit and minimum cost 5 Equitable Distribution of Wealth We determine the equitable distribution of wealth by the Gini Coefficient Gini was an Italian economist who told us how the wealth of a nation is distributed among the population The coefficient is from 0 to 1 1 having least distribution and 0 having the most US s Gini coefficient is at 0 46 The average EU country has a coefficient of 0 32 which is a big difference from the 0 46 Namibia has the highest coefficient and Japan or S Korea the lowest In USA the top 400 families control approximately the same amount of wealth as half of the population That is the level of unequal distribution of wealth John Holmes came with the idea of using people s height to determine the quality of living This is because height isn t dependent only on genes but also on food and health care He used army and slave data to support his research The Scandinavian countries have the tallest people and indeed their Gini coefficient is amongst the lowest Types of Monetary and Fiscal Policies The monetary and fiscal policies can be of two types 1 Complementary economic goals when one goal is achieved and it improves the other goal For example efficiency and economic growth 2 Contradictory economic goals when one goal is achieved but it harms another goal For example efficiency and unemployment This is because efficiency usually means a technological improvement Which leads to people being fired Hence unemployment goes up It is to be noted that still it will be termed as efficient growth because those people will eventually find another job though it may take some time Hence the overall efficiency of the economy increases and such it is beneficial