IEBE endterm
Theme 1: What is economics?
Economics is the study (the social science) of how people interact with each other and with their
natural surroundings in providing their livelihoods, and how this changes over time. The total of
these interactions is called the Economy. Economics is the study of the Economy.
Crisis a failure of the collective imagination of economists flaws or malfunctions in economic
models that were believed to properly work.
IMF The International Monetary Fund countries working together to foster global monetary
cooperation Global Financial Stability Report (GFSR) semi-annual report that assesses the
stability of global financial markets and the current vulnerabilities in the financial system.
Real-world perspective:
a. Is a strong awareness of the complex socio-economic reality:
Human behaviour is not always rational and markets are not always in equilibrium (in
balance). Institutions are important for understanding economic dynamics and so are the
dimensions of time and space.
b. Leads to a multidisciplinary economics approach, a research profile that favours crossing
borders (overlapping) between academic disciplines, but also – within economics discipline –
between economics and business.
Important economists 20th century
I. Adam Smith
The Wealth of Nations (1776)
II. John Maynard Keynes
The General Theory of Employment, Interest and Money (1936)
The Multiplier
III. Paul Samuelson
Nobel Memorial Prize (1970)
Economics: An Introductory Analysis (1948)
“It is the context that actually determines how you look upon data” = Theoretical
Spectacle
IV. Jan Tinbergen
Nobel Memorial Prize (1969)
Designer of the first two macro econometric models, PhD in physics method =
statistical testing of business cycles theories econometric model (US economy)
V. John Neville Keynes
The Scope and Method of Political Economy (1891)
Positive science descriptive science facts a body of systematized knowledge concerning what
is
Normative science prescriptive science opinions concerned with the ideal, distinguished from
the actual situation, subjective a body of systematized knowledge concerning what ought to be
(what should be)
Art craft/skill a system of rules for the attainment of a given end combination of the two
Synthesis: the combination of ideas to form a theory or system
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,Thomas Kuhn Normal science is characterized by consensus (overeenstemming) research
providing solutions to well-defined problems whose solution is assured and which are solved
according to specific rules and by meeting specific standards, as suggested by paradigm it has a
consensus on what the puzzles, solutions, rules and standards are if there is no consensus, this is
called crisis.
Natural science Social science
Experiments The conditions cannot always be controlled
Physical world Human behaviour
More rigid More flexible
There are many types of economists:
monetarists, Keynesians, Classical economists, supply-siders, anti-regulation economists, neoclassical
economists (synthesis of older economics and modern theories), etc.
Economic point of view economic terms, understand phenomena, theoretical categories, tools and
techniques.
Pluralism: The view that there exist multiple kinds and forms of knowledge, which may be
incommensurable (onvergelijkbaar) or inconsistent (tegenstrijdig) with one another, but none of
which can be shown to be superior or reducible to the other. In effect, there is no independent
standard that might be applied to judge between different views of what constitute (vormen)
knowledge.
Inductive versus Deductive reasoning
There is more than one type of reasoning.
Reasoning = action of constructing thoughts into a valid argument, based on logic/fact.
Two main ways of reasoning (approaches):
1) Inductive (qualitative, probability) Empirical = small, repeated observations statistical
and empirical inference observing phenomena, generalizing, formulating laws and theories
works to theory by examining related issues (data) trend/pattern, then generalizing
premises support the probable conclusion the more similar premises there are, the more
probable the generalized conclusion will be/is. The inductive approach is meant to create
new theories from data. In other words, induction goes from a specific instance to a
generalization.
2) Deductive (quantitative, certainty) Theoretical = general theory/statement/conclusion
(premises) logic and geometry general assumptions leas to specific, evidence based
conclusions confirm a hypothesis testing theories and formulating hypotheses using
more premises to work to an evidence-based conclusion. Using facts to come up with a
conclusion. The deductive approach is meant to test the theories that are created using
inductive reasoning. In other words, deduction goes from a generalization to a specific
instance.
Economics no controlled, physical experiments economics involves subjectivity and value
judgements.
Theme 2: The Economy - what is the subject of economics?
The subject-matter of economics
“Economics is the science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses.” (An Essay of the Nature and Significance of Economics Science –
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, Lionel Robbins 1932)
This definition is too limited individualistic, rational behaviour, materialistic, static
A more modern definition is:
“The study of how people interact with each other and with their surroundings in providing their
livelihoods, and how this changes over time.”
The Economy
The concept of ‘The Economy’ arose in the 20 th century, by imagination of:
a) Nation-State: something natural, bounded and subject to political management
b) International order: aggregates (imports and exports of goods and capital) and averages
(terms of trade, exchange rates) defined in terms of transactions between national
economies
c) The economy has behaviour; it can grow or fluctuate (T. Mitchell)
a) In the beginning of the 20th century, the only way the government interfered (political
management) was by means of money printing money hyperinflation
Other way needed to interfere with the economy:
The idea of political management in a non-monetary way came from John Maynard Keynes:
Y = C + I + (X – M) National Income
Y = C + I + G + (X – M) National Output government part of the economy (represented by the
Philips machine Keynesian equation working in a dynamic way)
b) Aggregate economy
Aggregate demand; Aggregate output; Aggregate income; Aggregate spending GDP = Gross
Domestic Product – about the public area, it does not cover that what happens in the household
itself (private
Statistics people started to plot data in the 19 th century in graphs patterns business/trade
cycle started to study it new way of looking upon economic activities ‘The Economy’
The first imaginations of an economy:
1. Le Tableau Économique by Ragnar Frisch (1933)
2. The economy as a circulation by Jan Tinbergen (1935)
Balance sheet: measure the same thing in two different ways
National account: bookkeeping of a country; a way of measuring an economy
GDP
Indicator of how well an economy was/is doing competition between countries
A measure of the total production (not only welfare) of a national economy in a year the
level of production is important because it largely determines how much a country can afford
to consume and it also affects the level of employment the consumption of goods and
services, both individually and collectively, is one of the most important factors influencing
the welfare of a community.
Not only the GDP is important to people, but also the HDI:
Human Development Index (HDI):
1. Life expectancy
2. Literacy
3. Real GDP
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