Macroeconomics
Econ 1102
Catherine Boulatoff (Section 02)
Course requirements
• Overall:
– Four sections, 730 students, 4 instructors, 8 TAs
– Head TA: Meredith Perich (mr467290@dal.ca )
– BbLearn page (http://dalhousie.blackboard.com)
• Meeting times:
– Class M, W, F: 11.35- 12.25 in Dunn 117.
– Tutorials, encouraged, but not required. Starting on Jan. 18th.
– Office hours: W: 1pm-2pm and
R: 1.00-2.00 p.m. (B25)
– Text Book: McConnell et al,
Macroeconomics, 14th Canadian Ed.
Grading Scheme:
• Assignments 5/6 (20%)
– all available online;
– posted on Friday, due by the following Friday, by 2.30 p.m.
– Individually or in groups of max. 3 from any section. Submit ONE copy, with names
and ID number, stapled
– Drop off in box in porch of 6206 University Avenue (picture)
– Check that correct grade was entered! If any problem, contact Head TA (leave
comment in box in Main Office)
– ANY LATE ASSIGNMENT = ZERO MARK
• Midterm Exam (30%)
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Multiple Choice questions and small problems
Only Calculator allowed: Sharp EL-243SB
Wed. February 24: 8.30-10 p.m. Location TBA
If missed, weight added to Final Exam. NO MAKE UP FOR MIDTERM
If conflict, early exam offered. Let me know by January 30!
• Final Exam (50%) TBA
– To pass the class, you need min. 50% overall, and min. 50% on final.
– Examination period: April 9 -23.
Final word of advice:
• TAKE NOTES!
• Power Point Presentation posted on BbL
before class, but exercises/ examples, done in
class only.
Chapter 1
Limits, Alternative, and Choices
Economic Analysis
• A study of how rational individuals, firms and
societies in general make decisions in a world
where resources are scarce.
• 10 key principles, divided into three
categories: (a) at the individual level, (b) that
explain the interaction among individuals,
and (c) that deal with the economy as a
whole.
• Microeconomics: Concerned with decision
making by individual customers, workers,
households, and business firms.
• Macroeconomics: Examines the performance
and behaviour of the economy as a whole.
Example:
10 key principles:
(a) concepts pertaining to the individual
1. Facing Trade-offs: Because we live in a world of
scarcity, we (individuals, societies) need to make
choices.
2. Opportunity Cost: The cost of the choice you make
is what you give up for it. Ex: trip to Montreal, by
train or by plane?
3. Choosing a little more or less: Rational people
often think at the at the margin. Comparing Marginal
Cost (MC) and Marginal Benefit (MB). Ex: Should you
go skiing this week-end?
4. Incentives matter: The choices we make are
influenced by incentives. Ex: Maternity/ Paternity
leave.
10 key principles:
(b) concepts that explain the interaction
among individuals:
5. Specialization and Trade: Through specialization and
trade, all participants stand to gain (i.e. their well-being
will improve).
6. The effectiveness of Markets: Market usually do a
good job at coordinating trade among individuals,
groups, or nations.
7. The Role of Governments: Sometimes however,
markets left on their own are not efficient, and
therefore government intervention can improve the
outcome (e.g. whenever there are externalities, a lack
of competition, or when dealing with public goods).
10 key principles:
(c) concepts that deal with the
economy as a whole
8. Production and the Standard of Living: A
country’s standard of living depends on its ability
to produce goods and services.
9. Money and Inflation: Prices rise when the
government prints too much money.
10. The trade-off between inflation and
unemployment: Society’s faces a short run
tradeoff between inflation and unemployment
(also known as the Phillips curve).
The economic Way of Thinking
• In the goal of maximizing utility, individuals and
institutions make rational decisions based on
comparisons of marginal benefits and marginal
costs. Ex: Get a Master degree?
• Economists form and test hypotheses of causeand-effect relationships to generate theories,
principles, and laws.
– Simplified models. Ex: Law of demand
– The difference between positive and normative statements: Positive
statements deal with facts; normative statements reflect value
judgments.
Pitfalls to avoid when applying
economic perspective:
• Biases, or preconceptions
• Loaded Terminology. Ex: “greedy companies”
• Fallacy of Composition: The assumption that what is true
for one individual or part of a whole is necessarily true for
all. Ex: Driving on scenic route.
• Post Hoc Fallacy. Be careful in concluding that event A leads
to event B. Ex: You wear cologne today, and you get a date;
is it because of the Cologne?
• Correlation and Causation: Correlation between two events
indicates that they are associated in some systematic way.
Causation implies a direction in the link between the two.
Ex: Studies show that married men, on average, earn more
income than unmarried men of the same age and
education level. Should we necessarily conclude that
marriage is the cause of higher income?
The Budget line
– The budget and time constraints: A schedule or curve
that shows various combinations of two products a
consumer can purchase with a specific money income.
Ex: Beth has a weekly budget of $100, that she can spend
on Apples or Oranges. PA=$1, Po=$2 (both per pound)
• Draw the budget constraint.
• Can she consume 50lbs of apples and 50lbs of
oranges?
• What is the opportunity cost of 1 apple?
• What happens if Beth’s budget (income) increases (to
say, $200)?
• What happens if PA=$2 (Po=$2 still)?
The production Possibility curve
(PPC)
• Just like individuals, societies also face
constraints:
– Scarce resources: Land, Labour, Capital,
Entrepreneurial ability
• Production Possibilities curve: A table or curve
showing the different combinations of two
products a society can produce given a specific
set of resources in a full-employment, fullproduction economy.
– Law of increasing opportunity cost
– Increases in resource supplies, improvements in
resource quality, and technological change will cause
economic growth (i.e. also an outward shift of the
PPC).
EX: Production Alternatives
• Below is a production possibilities table for
consumer goods (olives and grapes, in tons)
• Draw the PPC (grapes on horizontal axis)
• If the economy is at point C, what is the
(opportunity) cost of 2 more tons of olives?
• What would be the impact on the PPC of the
following events:
– An influx of migrants in the country?
– A series of wildfires occurring in the region where
primarily olive trees are grown?
– A new discovery of grape variety that resists better
to pests?
Final notes:
• Society’s choice as to the mix of capital and
consumer goods in current output is a major
determinant of the future outlook of its PPC
(and thus of the extent of economic growth).
– Graphical example.
• With international specialization and trade, a
country will be able to obtain (consume) more
goods and services than its PPC would indicate
– Hence the benefits from trade (see also Ch 17)
Homework for next class:
• Get book and calculator
• Read Ch. 1 Appendix: Working with
Graphs and their meanings.
• Try to complete additional exercises 1
and 2.
Additional problem (1):
On average, households in China save 40% of
their annual income each year, whereas
households in Canada save less than 5%.
Production possibilities are growing at roughly
9% in China, and 3.5% in Canada.
Use graphical analysis of present goods versus
future goods to explain the differences in
growth rates.
Additional problem (2)
• Assume the country of Greekola has the following
production alternative. Two goods can be
produced: Food and Clothing.
• Draw the PPC (food on the horizontal axis)
• Opportunity cost of one more kg of food when at
C?
Questions related to problem 2:
1. How would you expand this country’s PPC?
2. Let’s assume that Greekola currently
experiences high level of unemployment,
does it mean its PPC will shift inward?
3. If the country experienced a major
earthquake, which would destroy half of its
resources, how would you represent this
graphically?