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Economics for Political Scientists Lecture Notes

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Leiden University College The Hague (LUC)

This documents holds all precisely and well-taken notes of the course EPS in the first year of 2022/2023. Good luck with studying!

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Economics for Political Scientists - Dr. Matt Di Giuseppe
Economy, Society, and Public Policy
Friday 21 Dec, 09.00: Exam

Class 1: Introduction: Economic Growth and Inequality

● Incentives win over sentiment!
○ Restrict people’s ability and they’ll do what you want.
○ Pay people and they’ll do what you want.
○ Economic incentive: show up, so you’ll pass, get a degree, get a job, earn
money.

What is the Study of Economics?

➢ Like other social sciences it centers on the study of human behavior
➢ But, with a focus on:
○ Economic incentives
○ Economic outcomes
➢ What do we mean by economic incentives?
○ Choosing outcomes that improve your (or a group or country) economic
welfare.
■ What gives you more money than you had yesterday?
○ And how those choices are shaped by markets and other circumstances (like
policy)
➢ How people make choices under scarcity:
○ Scarcity is taken seriously, you don’t have an endless amount of money and
time, all operating under some form of scarcity.
○ Economy vs. Sentiment & Benevolence

What economic outcomes?

➢ The study of individual incentives is usually referred to as microeconomics.
○ Understanding the behavior of individuals and firms.
➢ The millions of incentives faced by billions of individuals and millions of firms lead
to aggregate outcomes.
○ Inequality
○ Economic growth & development
○ Economic crises
○ Inflation & unemployment
○ Trade & investment
➢ The study of these aggregated outcomes is generally referred to as macroeconomics
○ Understanding at the national, regional level

, ○ Business cycles and government response
○ International trade
○ International finance
○ Monetary policy

What economics doesn’t tell us

➢ Like other social science, we’re not primarily interested in what is ‘just’ or ‘fair’.
○ We’re not here to make moral judgements of what’s right or wrong. We’re
here to understand human behavior.
➢ Those questions can motivate the topics we study but they CANNOT influence the
conclusions we draw.
○ After all, this is a social SCIENCE.
○ “I think it’s bad for some people to be poor, so I want to understand economic
inequality.
➢ Science seeks to understand the world as it is not as we hope it to be.
○ There’s always been some sort of control from the government over the
economy. We might have ideal economic models, but once we introduce
politics, we have to revise them.

Economics vs. Political Economy

➢ If you want more exposure to the formal logic and equations behind basic insights,
you can look at the other text (The Economy).

Why do political scientists need to understand economic concepts

➢ In order to understand politics, we need the economy, and the other way around.
➢ Politics is about “who gets what, where, when and how.”
➢ More often than not, the “what” is an economic variable.
➢ More often than not, outcomes we care about are shaped by both political and
economic incentives.
➢ More often than not, politics will shape economic incentives in (un)intended ways.

, GROWTH AND INEQUALITY

Key concepts

➢ Nominal GDP (or GDP growth):
○ Gross domestic product is measured in current currency amounts.
■ Let’s say you have 1 pound 3 months ago, and you have 1 pound the
day Liz Truss announced her mini budget. The nominal value is that 1:
it’s the name value, same amount, sticker price.
■ We don’t really want to use nominal statistics, unless we change things
within the same time period.
○ Does not account for inflation or differences in purchasing power across
countries.
○ Simply refers to the “sticker price”, current amount, face of something.
■ Never really wanna use it unless we change things within the same
time period.

➢ Real GDP (GDP growth) (in constant prices):
○ Important for measuring changes over time
■ Take the 1 pound example from earlier, the value of the pound isn’t the
same in both cases, the pound fell.
○ Growth adjusted for changes in inflation
○ We translate current nominal prices to a consistent baseline
○ Applies to any type of price measure
■ Movie ticket sales
■ Stock market prices

➢ Purchasing power parity (koopkracht):
○ Important for measuring changes across countries and time
○ Growth adjusted for differences in currencies and what those currencies
purchase
■ Changing data is important for comparing correctly
● Like adjusting for correct currencies of the time of something
taking place
○ Generally we translate local economic activity in to its equivalent in US
dollars of a particular year
○ Consumer Price Index (CPI)

, Economic Growth

➢ Is the economy getting better or worse?
➢ GDP is an imperfect measure we rely on.
➢ We use this to compare the size of economies
○ Across time (GDP growth)
○ Across countries (level of development)
➢ Turning something inactive into active = Creating wealth = Economic growth
❖ Economic Growth: learning to produce more with the same stuff, eliminating waste
in society
○
Increases in… Short term causes:

Natural resource discovery Positive shocks (e.g. trade
agreements, rainfall, war)

Physical capital or infrastructure Negative external shocks (e.g.
COVID-19, trade war, Brexit, war)

Population Government monetary or fiscal
policy

Human Capital Consumer/business sentiment
(people hear bad things about the
economy, they spend less)

Technology

Law

What does GDP measure?

➢ GDP measures the market value of all finished goods produced within a country
(usually measured yearly or quarterly, by government statisticians).

❖ Finished goods: goods that will not be sold again as part of another good
◆ For example: eggs you buy and make yourself an omelet with. Those eggs
aren’t put into another product, but are used on their own, which would count
into the GDP.
❖ Intermediate goods: goods that will be used to make something else that will be sold
◆ For example: a baker buys a lot of eggs to make cakes. The purchase of the
eggs on their own doesn’t count into the GDP, they’re counted in the sale of
that cake. Otherwise you would count the sale of the eggs independently and

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