Mankiw Principles Of Economics Ppt
Muriel Pelley
This definition of economics is stated as fact, apparently not involving any value judgements. In fact, normative choices, that is choices involving values and moral judgements, are inescapable even in deciding how to define economics.
This set of commentaries deals with microeconomics, so the last three principles dealing with macroeconomics will be ignored. For the rest, mostly brief comments are in order here because more detailed commentary is best placed in the chapters where these ideas are set out in more detail.
As will be explained in the commentary on Chapter 20, this superficially plausible theoretical explanation is too simplistic. Moreover, there is good evidence that high levels of inequality shrink the economic pie, and that policies that reduce inequality can actually increase the size of the pie.
Choosing to do one thing necessarily involves giving up the opportunity of doing something else. Every cost in economics is really such an opportunity cost. Rational choice between alternatives requires considering opportunity costs. The textbooks, along with most economic theory, simplify the situation by assuming perfect information about available alternatives (or, that possible outcomes of choices can be described in terms of known probabilities). However, many decisions are made in conditions of fundamental uncertainty, as in the examples given in the next section.
People do respond to incentives, but their responses to incentives can be more complex than simple economic theory assumes. For example, some economists, including Mankiw, have advocated paying people to get vaccinated against Covid-19 and some state governments in the United States have experimented with various rewards.
However, psychologists and behavioural economists (i.e. economists who apply psychological research to economic questions) have found that offering monetary incentives can influence how people think about the activity. In this case, some people could conclude that payment is offered because the vaccine is risky; the higher the payment, the higher the perceived risk.
Behavioural economists and others have also found that people motivated by prosocial behaviour, such as donating blood because it benefits others, may reduce that behaviour if offered some monetary reward. Because getting a vaccine benefits others by reducing their chances of getting infected, this could be an issue here as well.
Comparing countries to families is fundamentally wrong. It obscures the fact that countries are made up of many different families, some of whom will gain from increased trade and some of whom will be worse off (for example if they lose their jobs because of increased import competition). Economists have no basis for saying that a country as a whole is better off after trade. This necessarily involves a value judgement about the gains and losses in all, about which reasonable people can disagree. (This will be examined further in the Commentaries to Chapters 3 and 9.)
But there is no evidence for this. OECD data on income distribution (measured by the Gini index for net household income) show very high inequality in very poor countries such as South Africa, Chile, Mexico, Turkey or Bulgaria. In contrast, the economically very powerful Scandinavian countries - measured by gross domestic product per capita - are characterized by very low inequality of household incomes.
A completely different understanding of the state can be found in the classic description of state functions by the public finance specialist Richard A. Musgrave (1959), which in my opinion is still relevant today. He systematically distinguishes between the distribution function, the allocation function and the stabilization function of the state. In contrast to Mankiw, who speaks only of the possibility of state intervention, Musgrave (1989, p.7) states:
The conflict of objectives generally claimed by Mankiw exists only in the situation following a supply shock. Here, the central bank (or the Ministry of Finance) must actually ask itself whether stabilizing output or the price level should have priority.
Analytically, the above diagrams give the impression that minimum wages have a clearly negative impact on employment. The diagram assumes that there is full competition on both the supply and the demand side of the labor market and that the substitution effect outweighs the income effect in the case of wage changes. Only then is there a positive increase in labor supply curve.
This result can be derived in principle within the framework of the AS/AD model. It should be noted, however, that this model is derived from the IS-LM model. In the IS-LM model, it is assumed that the central bank keeps the nominal money supply constant. If the price level falls, the real money supply (M/P) increases. Given the demand for money, this causes the nominal interest rate to fall. The falling nominal interest rate increases interest rate-dependent investment, which increases aggregate demand via the investment multiplier. From this point of view, a falling price level can in principle lead to the movement on the AD curve from B to C. The movement on the AD curve from B to C is therefore a result of the falling price level.
What Mankiw does not take into account, however, is that in the case of deflation the lower zero interest rate bound for the nominal interest rate can quickly be reached. This means that there is already a lower limit for the decline in the nominal interest rate, which in principle stabilizes the economy. And since investment is not determined by the nominal interest rate but by the real interest rate, in the event of deflation after the zero lower bound has been reached for the nominal interest rate, the real interest rate actually rises as deflation progresses. Instead of a stabilizing process, we are then dealing with a destabilizing process.
This description of the relationship between government debt and economic growth is likely to be particularly relevant for economic policy. Mankiw deduces that government debt reduces savings and thus investment in an economy. This has a negative impact on economic growth.
But even in the classical model framework, the result derived by Mankiw is anything but compelling. Rather, it arises from the implicit assumption that the government uses the funds it borrows exclusively for consumption. Moreover, it is characterized by the curious assumption that additional government demand for credit does not increase aggregate demand for credit, but reduces the supply of credit funds resulting from household saving.
If we assume instead that the government borrows to finance investment, the picture changes fundamentally. The effect can then be represented by a shift in the demand for credit (and not by a shift in the supply of funds from savings). The shift in investment demand then leads to an increase in the interest rate and, in the new equilibrium, to more saving and more investment.
The causality assumed by the money creation multiplier model, according to which a higher central bank money supply leads to more bank loans and an increase in the money supply, is also inaccurate insofar as central banks do not control commercial bank lending via the monetary base in normal times, but via the money market interest rate. For a more detailed discussion of these relationships, see ECB (2011).
Apart from the general confusion, this derivation is at the same time an expression of a misunderstanding of the logic of the (neo)classical model. For this model, the exchange rate is a non-existent quantity. As already mentioned several times, in this model world there is only one all-purpose good. Exchange is thus only possible inter-temporally, not intra-temporally. The all-purpose good thus has no price in intra-temporal trade. Therefore, there are no national price levels in this world. And if there is no intra-temporal trade between two countries, but only intertemporal trade, the exchange rate is an irrelevant quantity.
To make a long story short: nothing. What this chart actually depicts is the aggregate goods market, i.e. the relationship between aggregate demand, which is composed of income-dependent consumption and interest-dependent investment, and short-term aggregate supply, which is represented by the 45 degree line. The Keynesian element is this slope of the supply curve, which is assumed by the 45 degree line to be determined by aggregate demand.
In the 10th edition of his macro book, Mankiw presents the AS/AD model only with a long-run, vertical aggregate supply curve. He has deleted the short-term supply curve, which was still presented in earlier editions, without replacement. This is appropriate insofar as there is no room in the model for a second short-term supply curve. However, one could have retained the AS curve and interpreted it quite simply as a Phillips curve for the price level.
For a detailed discussion and critique of the AS/AD model, see Bofinger (2011). A simple alternative for doctrine, which takes into account the fact that the central bank does not use the money supply but the (real) interest rate as an instrument and thus does not control the price level but the inflation rate, is the model developed by Bofinger, Mayer and Wollmershuser (2002 and 2006).
Mankiw, N Gregory (2020a), An ambassador of the economics profession, Gregory Mankiw reflects on three decades as a textbook author. Interview with Chris Fleisher and Tyler Smith, April 29, 2020. -mankiw-reflections-textbook-author.
1. Things are real because they are socially constructed.
2. Society is not just the aggregation of discrete, pre-existing individuals. That is, the individual is not ontologically prior to the social.
3. The ideas we hold about the world change the world.
4. The language we use to describe the world changes the world.
5. Society cannot be understood by looking at individuals separately from their interconnections and their environments (both social and physical).
6. The economy is not separate from the political or social world.