Introduction To Economics And Business Economics (ECB1IEBE)
Class notes
Theme 4: Macroeconomics & Statistics articles & reading questions - Introduction To Economics And Business Economics (ECB1IEBE)
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Course
Introduction To Economics And Business Economics (ECB1IEBE)
Institution
Universiteit Utrecht (UU)
This document contains the necessary material for Theme 4 of the course Introduction to Economics and Business Economics. The document contains the articles (Hoover 2012: Macroeconomics & Sachs & Gordon 2008: Geography of regional development) and addresses the corresponding theme questions.
Macroeconomics
a. Economic fluctuations (malfunctioning economy) irregular rising and falling of the
economy a cycle
b. Economic growth (functioning economy) a trend
Macroeconomics (two definitions) Microeconomics (two definitions)
“The study of the relationships among “The study of the behaviour of individual
aggregate quantities (or aggregates) such as economic actors – individual people,
GDP, employment, unemployment, inflation, households, and firms.”
interest rates, exchange rates, and the balance
of trade.”
“The study of the economy taken as a whole” “The study of a part of the economy, taking the
remainder as given.”
The second definitions are better A study that is regarded as microeconomics may use aggregated
data and vice versa.
The distinction between the study of the economy as a whole and the study of its individual parts,
taking the rest of the economy as given, is an important one. Fallacy of composition: the
assumption that what holds for a part must hold for the whole as well. What is true for the
individual is not necessarily true for the market as a whole
Goal macroeconomics To provide an analysis of the economy that does not commit fallacies of
composition.
Origins of Macroeconmics
Adam Smith: Wealth of Nations 1776 no clear distinction between micro- and
macroeconomics
Industrial Revolution focus on business cycles reconceptualization this was
accelerated by The Great Depression different sort of analysis
John Maynard Keynes: General Theory of Employment, Interest and Money provides the
foundations of modern macroeconomics (mainly through government intervention)
Ragnar Frisch first one to use the terms micro- and macroeconomics
Ragnar Frisch & Jan Tinbergen set the stage for the way om which modern
macroeconomics analyses the economy use of models for central planning
macroeconomics as a tool for government intervention to counteract recessions
Macroeconomics positive or normative? The goals of the policymaker are normative. What the
policymaker can do to achieve those goals is positive. Still macroeconomics is more of a positive
science that aims principally to understand how the economy works in a way that is neutral between
those who advocate intervention and those who oppose it.
Positive economics how things are (in fact) objective, fact-based data analysis
Normative economics how things be ideological, subjective and value-based
Economics social science it involves human beings rather than inert matter (natural science)
economics is complex and experimentation is difficult models
Economic premise ‘people behave rationally’ People are assumed to adapt their actions
efficiently to their own desires, whatever those desires are.
, Features of controlled experiments:
They help to isolate causes
They are most revealing
They simplify
They can be repeated
The economy is to complex to do such experiments on any large scale Instead we must simply
observe the economy and try to infer its mechanisms through other means Models: can be used
as instruments of measurement and as the basis for counterfactual experiments supporting
conditional and unconditional forecasting and mechanism design or policy
Economic models can be thought of as maps: They must display only relevant information
depending on the purpose of it; To be useful, they are highly simplified Economics: the science of
making economic maps
Counterfactual experiment: one in which we alter the facts represented in the model to be different
from what they actually are in the world in order to answer a what-would-happen-if question.
a. Unconditional Forecasts
b. Conditional Forecasts
c. Mechanism Design
I. Fiscal policy – concerned with government expenditure & taxation
II. Monetary policy – concerned with government’s financial portfolio and the configuration of
interest rates
Sachs & Gordon 2008: Geography of regional development
The theory of agglomeration attempts to explain why some regions develop more than others, why
cities arise and where they are located.
Theories of agglomeration:
Alfred Marshall (1920): Spatial concentration happens because of knowledge spillovers,
larger markets for specialized skills, and back an forward linkages associated with large local
markets
Von Thünen Model (1826): Begins with the existence of a city and derives characteristics
about land rents and land use surrounding the city; the resulting unplanned, efficient
outcome is a concentric ring pattern of production referred to as ‘Von Thünen cones’.
Later models: spatial concentration occurs because production is cheaper due to the large
amount of nearby economic activity in agglomeration economies
Florida (1995): Firms benefit from spatially concentrating their activities, and thus firms
looking to enlarge their capabilities have a strong motive to locate in these learning regions
The theoretical backbone of the ‘new economic geography’ is the core-periphery model (Krugman
1991) It looks at three effects: the ‘market-acces effect’, the ‘cost-of-living effect’, and the ‘market-
crowding effect’
Clusters A cluster is a group of interconnected companies and institutions in a particular location
Benefits: complementarities, spillovers and a relationship with public institutions
The ‘new economic geography’ excludes intrinsic geographical (dis)advantages in the theory of
agglomeration. Physical geography adds the effects of intrinsic geographical advantages on
agglomeration. The role of geographical variables is brought to force in this approach.
Geographical advantages can trigger subsequent agglomeration based on increasing returns to scale.
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