Understanding Economics: Microeconomics and Macroeconomics
Economic Principles
Economy: The study of how humans meet their needs using scarce resources. It deals with the production of goods and services (supply) and consumption of goods and services (demand). Factors of production include natural, human, and manufactured resources. Economic theory attempts to explain the process of managing scarce resources.
Methodology
- Set assumptions about the behavior of agents and the logical context.
- Deduce social conclusions or predictions about the studied reality.
- Contrast predictions with the facts and quantify the relationship between variables.
Microeconomics
Microeconomics studies consumers, businesses, goods, and markets, and the relationships between these units in the pattern of production and distribution of goods and services. It deduces testable propositions about the functioning of the economy, studying the decisions on what goods and services to produce, how to produce them, and for whom.
Macroeconomics
Macroeconomics studies the determination of levels of aggregate output, employment, and prices in an economy and their changes over time. It refers to the overall performance of the economy.
Methodology
Macroeconomics uses models. A macroeconomic model is a simplified representation of the economy, expressed through a system of equations that interrelate a set of aggregate variables. From this, predictions are made about the future behavior of variables.
Aggregation Problems
If macroeconomics were simply the aggregation of microeconomic variables, it would not make sense at the aggregate level since individual behavior is canceled out.
Macroeconomic Models
General assumptions are built on establishing the causes of economic phenomena and undertaking simplifying assumptions to dispense with secondary factors. These models serve to explain the causes of economic phenomena, predict outcomes, and draw conclusions through deduction.
Types of Variables
- Endogenous: Explained by the model.
- Exogenous: Explained by external factors.
- Flow: Measured over a period of time (e.g., rent, investment fund).
- Stock: Referred to a specific moment (e.g., money supply, productive capital).
- Nominal: Monetary units valued at the current period (e.g., unemployment rate).
- Real or Constant: Units valued at a reference period’s monetary value. These are derived by dividing nominal variables by a price index and reflect real purchasing power.
Types of Relationships Between Variables
- Identities or Definitions: Always valid.
- Equations: Valid for some values of variables.
- Equilibrium Conditions: Equalities imposed to achieve the equilibrium of the economic system.
- Deterministic: Each value of one variable corresponds exactly to one value of another.
- Stochastic: Each value of one variable corresponds to different values of another variable.
National Product (NP)
National Product (NP): The total current value of final goods and services (G&S) in an economy generated per unit of time. It is a flow variable representing the total value of final G&S.
Estimation
It is considered as the sum of all companies’ values, taking into account only the final value of the product. If current prices are used, the NP is measured at current prices; if prices from a given period are used, it is at constant prices.
Includes
Goods produced, so it does not consider transactions where the value is not increased.
Does Not Include
- Subsistence production.
- Non-market activities (housework or volunteer work).
- Valuation of leisure activities.
- Illegal or underground economy activities.
Calculation of NP
- Product Method: Add the value of all domestically produced G&S in one year.
- Spending Method: NP is equal to the expenditure needed to purchase the output of the economy during the considered period (NP = National Expenditure).
- Income Method: NP equals the total revenue earned by the productive factors in return for their contribution to the productive process (NP = National Income (Y)).