3. Course Outline
• Macro issues and measurement
• Basic model of the determination of GDP in
the short-run
• GDP in an open economy with government
• GDP and the price level in short-, long-run
• Role of money in macroeconomics
• Balance of payments and exchange rates
• Macroeconomic policy in a n open economy
Lecture 1, 2009-02-02 3
4. AGENDA
• Economic Advice - The difference
between positive and normative
statements
• How economists set out their
theories
• How economic data are handled
• How economic relationships are
represented in diagrams
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5. Introduction
• What make some countries grow richer while others seem to
get poorer?
• Why do we sometimes have recessions?
• When should the government try to influence markets?
• What are the costs and benefits of globalization?
• Will some new technology eliminate many jobs?
• In order to get a handle on such big
issues, economists have developed ways
of
• setting out and testing their theories
• using what they have learned in order to provide
advice on how things could be improved
5Lecture 1, 2009-02-02
6. • We start by discussing an important
distinction relating to the types of
statements that are used in giving
advice
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7. Positive and Normative
Statements
• Economists give advice on wide
variety of topics
• Two broad types of statements
–POSITIVE AND NORMATIVE
STATEMENTS
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8. Normative Statement
• NS depends on value
judgements
• NS involve issues of personal
opinions; and
• Cannot be settled by recourse
to facts
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9. Positive Statements
• Do not involve value
judgements
• They are statements about
–What is
–What was or
–What will be
• They are statements about
facts
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10. Positive and Normative
Statement
• Distinguishing what is true from what
we would like to be, or what we feel
ought to be, depends to a great
extent on being able to distinguish
between positive and normative
statements
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11. Positive and Normative
Statement
Positive Normative
• Higher interest rates cause people to
save more
• High income tax rates discourage
effort
• High taxes on cigarettes discourage
smoking
• Road use charges would increase
traffic
• People are more worried about
inflation than unemployment
• The burning of fossil fuels is causing
global warming
• People should save more
• Governments should tax the rich to
help the poor
• Smoking should be discouraged
• The tax system should be used to
reduce traffic
• Technical change is a bad thing
because it puts some people out of
work
• Governments should do more to
reduce carbon emissions in order to
save the planet from global warming
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12. Positive and Normative
Statements
• To test the
‘positiveness’/’normativeness’ of a
statement:
– Is the statement only about actual or
alleged facts?
– Are value judgements necessary to
assess the truth of the statement?
12Lecture 1, 2009-02-02
14. Economic Theorizing
• Why has the computer and internet
revolution of the last few decades not led
to an increase in the trend growth rate of
most major economies?
• Does globalisation help to raise living
standards in the developing countries?
• To address these questions, economists have
developed an approach that involves
developing theories and building models
14Lecture 1, 2009-02-02
15. THEORIES
• Theories are constructed to explain
things
• E.g. what determines the number of eggs
sold at the Makola market in a particular
week? (demand theory)
• Theories built around
– Definitions (variables)
– Assumptions (motives, physical
relationships, conditions of application,
direction of causation)
– Predictions (propositions deduced)
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16. MODELS
• Models (economic models) have several
different but related meanings
– ‘Model’ may be synonymous to ‘theories’
– ‘Model’ may mean a specific quantitative
formulation of a theory
– Specific numbers attached to maths relationships defined by
the theory
– ‘Model’ may refer to an application of a general
theory in a specific context
– E.g. consumer demand of egg in the Accra market
– ‘Model’ may be an illustrative abstraction, not
meant to be elaborate enough to be tested
– E.g. the circular flow of income
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17. Economic Theorizing
• Evidence
– economists make use of empirical observation to
test a specific prediction of some theory
• Tests
– theories tested by confronting its predictions
with evidence
• Economists still disagree after all these
processes. Why?
– Different benchmarks, short- or long-term
consequences, ignorance of economists, different
values of economists, and media bias
Lecture 1, 2009-02-02 17
19. Economic Data
• Economists seek to explain observations
made of the real world
• E.g. why did the price of tomatoes rise in certain years
even though the tomato crop increased
• We will be aware of this issue only if we
have numbers for the tomato crop and its
price
• Real world observations are also needed to
test the predictions of economic theories
• E.g. higher savings resulting from income tax cuts
• To test the predictions there is the need to
collect data
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20. Displaying Data
• Tables
• Graph
– Cross-sectional – different obs on one variable all
taken in different places at the same time
– Time series – obs on one variable at successive points
in time
– Scatter diagrams – to show relationship between two
different variables
• Index
– (Relative or absolute movements)
20Lecture 1, 2009-02-02
21. TABLE
Price of cocoa and coffee (average price in each quarter, US cents per kg)
Period Cocoa Coffee
2001 Q1
2001 Q2
2001 Q3
2001 Q4
2002 Q2
100.4
104.5
100.8
121.8
149.0
146.7
146.4
129.6
126.4
136.6
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22. INDEX
Period Cocoa Coffee Index of coffee prices
2001 Q1
2001 Q2
2001 Q3
2001 Q4
2002 Q2
100.4
104.5
100.8
121.8
149.0
146.7
146.4
129.6
126.4
136.6
(146.7/146.7)*100=100
(146.4/146.7)*100=99.8
(129.6/146.7)*100=88.4
(126.4/146.7)*100=86.2
(136.6/146.7)*100=93.1
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25. Graphing Economic
Relationships
• Theories are built on assumptions
about relationships between variables
• How are such relationships expressed
• When one variable is related to another
in such a way that to every value of
one variable, there is only on possible
value of the second variable, we say
that the second variable is the
function of the first
25Lecture 1, 2009-02-02
26. Graphing Economic
Relationships
• Functional relationship can be
expressed in
– words,
– E.g. when income is zero, the family will spend
GHC800 a year (either by borrowing or consuming
past savings), and for every GHC1 of income that it
obtains it will increase its spending by 80pesewas
– numerical schedule,
– mathematical equation
– a graph.
26Lecture 1, 2009-02-02
27. Graphing Economic
Relationships
• From graph we obtain slopes
– Straight line slope
– Nonlinear relationships
– Maxima and minima
Lecture 1, 2009-02-02 27
