Notes on Economics


Here are my notes from "Economics", 3rd Edition by Timothy Taylor, from The Teaching Company. The series is excellent. I highly recommend it. You can buy it here.

All societies face these economic questions: What should be produced? How should it be produced? Who get to consume what is produced.

Elasticity is how much quantity demanded or supplied varies in response to a price change.

Elasticity of demand is (% change in quantity demanded)/(% change in price)

Elasticity of supply is (% change in quantity supplied)/(% change in price)

Inelastic demand means elasticity is less than 1.

Elastic demand means elasticity greater than 1.

Unitary elasticity of demand means elasticity is 1.

Raising prices on an inelastic item means more revenue.

Raising prices on an elastic item is not guaranteed to bring in more revenue.

Supply and demand tend to be inelastic over the short term and more elastic over longer times.

Rate of return is based on three factors: compensation for expected inflation, compensation for risk, compensation for the time value of money.

The interest rate minus the inflation rate is the "real" interest rate.

Present Discounted Value, PDV = (FV)/(1+r)^t, where FV is future value, r is the interest rate and t is the number of years.

Gross domestic product is the total value of final goods and services produced in an economy in a year.

GDP can be measured by looking at what is produced, or measuring what is consumed since they should be equal.

From the demand side GDP is C+I+G+X-M

Consumption - Investment - Government - Exports - Imports = GDP

"real" means adjusted for inflation.

GDP per capita is a nation's GDP divided by population

Four goals of Macroeconomic Policy:

   1. Economic growth

   2. low unemployment

   3. low inflation

   4. sustainable balance of trade

These goals often conflict with each other.

Two main tools of Macroeconomic policy are fiscal policy and monetary policy

PV(1+g)^t = Future Value, small changes is g, rate of growth, make huge difference over many years

Productivity growth, being more efficient in producing, leads to economic growth.

Balance of Trade: current account balance

current account deficit is equal to net flow of foreign investment into a country.

"Trade deficits are not about "unfair" trade but, instead, result from national levels of saving and investment."

Current account balance includes trade in goods, services, investment income, and unilateral transfers.

A trade deficit literally means the same thing as a nation that on net borrows from abroad.

National Savings and investment identity: Domestic Savings + Inflows of Foreign Capital = Domestic Investment + Government Borrowing

If a government borrows more, by definition one of three things happens: domestic investment goes down, domestic savings go up, inflows of foreign capital rise.

"From a macroeconomic perspective, unfair foreign trade practices, contrary to the argument one often hears, have nothing to do with US trade deficits."