Macroeconomics: Lessons in Review

Note-taking from reading books and lectures

Getting in touch with economics:

- The market’s ability to do the world’s work without anyone being in

charge strikes us as a phenomenon no less profound than the existence
of consciousness or life itself.
- The creation of the market system is one of the greatest achievements of
humankind.

Essential principles of economic analysis:

 Optimization: ppl always tries to choose the best available option.
Optimization is a useful tool for predicting human behavior (conceptual)
 Equilibrium: economic systems operate in equilibrium – a state in which
everyone is simultaneously try to optimize (conceptual)
 Empiricism: methodological. Economists use data to test economic
theories, learn about the world, and speak to policy makers

Chapter 0: The Principles and Practice of Economics

Economics involves far more than money. Choice—not money—is the
unifying feature of all the things that economists’ study.
Economic Agents and Economic Resources
An economic agent: is an individual or a group (a government, a firm, a
university…) that makes choices
Economic resources: Scarce resources are things that ppl want exceeds the
quantity that is available
Definition of Economics
Economics is the study of how agents choose to allocate scarce resources
and how those choices affect society.
Positive Economics and Normative Economics: 2 types of
economic analysis
- Positive Economics describes What ppl Actually Do? Describing
What has happened or predicting what will happen?
 - Normative Economics: advises individuals and society on their
choices. Normative economics is about that ppl OUGHT TO DO
-
Normative Analysis and Public Policy
Normative Analysis also generates advice to society in general: evaluating
public policies. Public policies create winners and losers, economists have to
make ethical judgements. Deciding whether the costs experienced by the
losers are justified by the benefits experienced by the winner: an ethical
judgment

Chapter 1: The Economy: Myth and Reality

1. The American Economy: A thumbnail sketch (bản phác thảo thu nhỏ)

The American economy - The biggest national economy on Earth for 2 reasons:
- One of the most effective 1st reason: America is the 3rd most populous nation on
economic system Earth after China & India
 American workers are among the most productive in
the world
An economic system - A machine that takes inputs (labor + technology) or
factors of production and transforms them into
outputs
- American economic machine performs this task with
extraordinary efficiency

Now lets’ look closer at the US economy and its components

1.1) A private-Enterprise Economy
- A part of American economic success
- Private sector and free markets have flourished here
- Remains as “the land of opportunities”
- Stands out as “the most privatized” nation (even city bus & all utilities:
electricity + gas - belong to private companies)
- One of the most “marketized” economies
1.2)A Relatively “Closed” Economy
 - One of the most severe misconceptions about the U.S economy is the
myth that this country no longer manufactures anything, but imports
everything from China.
- In fact, as of 2017, ONLY 15% of U.S GDP was imported with importing
from China making up LESS than one-sixth of those imports (the number
is pretty the same as of 2023)
- The fact is the US still produce most of what they consume and consume
most of what they produce
- An economy’s openness: the more integrated an economy is in the world
econ0my, the more open it is. One way to look at it is: the ratio of imports
plus exports to GDP
1.3) A Growing Economy
- American economy gets bigger almost every year
- American real GDP per capita: 3 times higher in 2007 than in 1960
- The PPP (purchasing power: the amount of money that a person has
available to spend) INCREASED NEARLY NINEFOLD over the 20 th
century
1.4)But with Bumps along the Growth Path
- Periods of good and bad times: economic fluctuations or business cycles
- Periods of declining economic activities: recessions
2.The inputs: Labor and Capital
2.1)The American workforce:
- 2017: 53% of the workforce was men & 47% was women
- Massive entrance of women into the paid labor force: one of the major
social transformations of American life during the 2nd half of the 20th
century
2.2)The American workforce
- The majority of American workers – like workers in all developed
countries – produce services, NOT GOODS.
- Manufacturing companies in the US employed only 12 million ppl (in
2017), and a third of those worked in offices rather in factories
2.3)The Central role of business firms
 - In 2016, there were almost 30 million business firms in the US – about
ONE for every 11 people
- 8% of businesses fails each year
- Competition is the key to industrial efficiency
2.4)The government
- In 2016-2017: how the U.S. economy works: Almost 30 million private
businesses, employ about 53 million workers & about $40trillion of
capital – selling products to more than 320 million consumers
- Role of the government
 Making and enforcing the laws
 Regulating business
 Providing certain goods & services such as national defense
 Levying taxes to pay for goods & services
 Redistributing income

Chapter 2: Core concepts

Macroeconomics focuses on the behavior of the economy as a whole

Macroeconomics: The Whole is Greater than the Sum of Its Parts

- Many thousands or millions of individual actions COMPOUND upon one
another to produce an outcome that isn’t simply the sum of those
individual actions
- For example: (the paradox of thrift) when families and businesses are
worried about the possibility of economic hard times, they prepare by
cutting their spending => reduction in spending depresses the
economy as consumers spend LESS and business react by laying off
workers => preparing for hard times by saving more – ends up harming
everyone
Macroeconomics: Theory and Policy
- To be concerned with questions about policy, WHAT the government can
do to make macroeconomic performance better
History of Macroeconomics and Public Policy
 Before 1930s:
- Economists tended to regard the economy as SELF – REGULATING
- Economic problems (such as unemployment) could be corrected through
the invisible hand and the attempt of the government is ineffective (or
probably makes things worse)
- Great Depression CHANGED all that
 1936:
- John Maynard Keynes published “The General Theory of Employment,
Interest, and Money” (transforming macroeconomics) – arguing that “a
depressed economy”: is the result of inadequate spending, a government
intervention can HELP with “monetary policy, and fiscal policy”
- Monetary policy: using changes in the QUANTITY OF MONEY to ALTER
interest rates -> affecting the overall spending
- Fiscal policy: using changes in TAXES and GOVERNMENT SPENDING ->
affecting the overall spending
 Managing the economy is a government responsibility
The Business Cycle
- The short-run alteration between recessions and expansions
- Recessions (contractions): periods of economic downturn when output
and employment are falling
- Expansions (recoveries): periods of economic upturn when output and
employment are rising
- A business-cycle peak: the point at which the economy turns from
expansion to recession
- A business-cycle trough (chạm đáy): the point at which the economy
turns from recession to expansion
-
3. Aggregate Output
- GDP: the measure of aggregate output (the gross domestic product)
- There are 3 ways of measuring GDP: 1st based on the added-value; 2nd based
on final goods and services; 3rd based on total income
- Nominal GDP: the sum of quantities of final goods produced * their current
price
- Real GDP: Nominal GDP