Unit 1: What’s Economics ?

9/17/2019
1.Branches of Economics

Applied economics:
● Economic History: observing, studies the past
● Economic structure: (ex:Globalization)
● Development:

Policy=specific objective

2.Economic activity: processes

Economic Activity=system
Process=transformation
Outputs=goods and services
Inputs=land, capital and labour

Factory products: matière première

Manufactured products: transformed product

Distribution law/rule
Capitalist system: if you are the owner of the company you are gonna get profit, if
you are a worker you are gonna get a salary

Specialisation and productivity rises

Specialization: specializing my productivity
You need exchange to specialize
Ex:

Productivity: ratio between outputs and inputs

Label productivity
Ratio between my production and my labor
Ex: I have 2 workers and I make 2 tables=my productivity is 5
Productivity is variable
Specialization increases productivity
Specialization allows mécanisation

Elasticity (next Unit)

3.Economic activity: agents and interactions

The Domestic Circular Flow of Income & Spending

Household=individuals/group of individuals that are sharing their income

Your alone and not sharing:
Sharing:Household

Firms=companies
Organisations that reveals goods and services to maximise profit

Government=(not the right concept in the graphic) Public sector

Public administrations (councils) and public companies with the end of maximising
social wealth by providing public services (health) and social benefits
(unemployment benefits) that are financed by taxes.

Households are gonna buy products and services from companies (look at graphic)
Companies also pay interest and profits to the owners and interests to the landers

2 more: Financial sector land money to those agents that need it to consume or
invest Intermediary between savings and investment
Those … with companies households and public sectors from the rest of the world
that normally paid with foreign currency

4.Economic doctrines and Schools of thought

Pre-classical period
Mercantilism=product of financial and trade leaders
More related to economic policy than economic theory
Imports and exports were paid with silver and gold

9/30/2019
Physiocrats=
-France, 18th century
-Authors: F.Quesnay and A.Turgot
-Wealth of nations derived from land (agriculture)

Produit net: they defend created entirely in the agricultural sector

workers add the value of labor/transforming the value of labor
your need agricultural productivity
refusing the importance of international trade
Natural law=law that is explaining the economic behavior
don’t intervening: laisser faire, pas laisser faire

Adam Smith: Scottish Economist, published one of the most important book The
Wealth of Nations, 1776
Main ideas: individual interest, free market and competition should maximize the
social welfare.
(Efficiency definition: if you are are to produce more with less resources, or if …)
Example: The bakers want to get profit, so they produce a lot of bread. Therefore
the consumers are gonna take advantage of this behavior, because the price is
going to get cheaper. It’s not because of the baker’s solidarity.

David Ricardo: first one to be worried about distribution. Theories about the
distribution of wealth.
1. Labour theory of value: Ricardo tries to explain the value of things. The value
of goods/services depends of the quantity of labour that those goods/services
are incorporating. He is also talking about intellectual labor
2. Comparative advantage theory: This theory implicates globalization. It is
focused on international trade theory. He is recommending that every country
should specialize in those productions where they are more productive.
This theory should maximise the world production.

Classics: the Labour Theory of Value

The first classical economist was Thomas Malthus: famous for his theories on
population.
He thinks that agricultural production was growing at a arithmetical rate and
population at a geometrical rate.
Ar: An=An-1+C
Go: An=An-1*C
Population grows faster than agricultural production. This different rates of growth
are his main concern.
His theory is able to explain the past.

Marxism: Marx deeply analysed Capitalism (Capital, V.1, 1867)

Marx says very few things about socialism.
Main prediction: capitalism would collapse due to their internal law: maximization of
profits
Not rational system. If everybody wants to maximise their profit, the system would
collapse. This objective of profit maximization:
Workers are exploited by capitalist to get the surplus:
-Class struggle
-Capital concentration
-High unemployment
-Subsistence salaries
-Periodical Crisis (overproduction/underconsumption)
The capitalist is going to pay salaries for the subsistence of the working class.
The recommendation at this moment was revolution. It is a very political concept.

A new school of thoughts appears.

Neoclassical School:
They try to include mathematical models in their explanations. At this moment, the
discipline was called Political Economy, it’s not a subdiscipline. Although it is not
making political elements.
They try to make the discipline more scientific, to make it more neutral.
They were worried about global analysis, and tried to avoid it.
Main authors: C.menger, L.Walras, V.Pareto, F,Hayek
One of the most important issues: they try to maximise their happiness (utility) by the
means of rational elections. Methodological individualism.
Value is determined by utility.

Keynesianism:
J.M Keynes
Mainstream during the Great Depression crisis (1929).
General Theory of Employment, Interest and Money.
Free market doesn’t lead to full employment.

Say’s Law, Jean Baptiste (classical economist): the supplies (producers) creates its
own demand. This theory is rejected by Keynes, because people can save. He
thinks that as a consequence, we will create crisis.
Conclusion: free market doesn’t lead to full employment.
State Intervention:
1. Fiscal Policy
2. Monetary policy

Monetarism:
Oils crisis in the 70s: stagflation (stagnation and inflation). Keynesian
recommendations were not useful to face this crisis.
The course was higher because we had to pay more for oil: the whole market was
affected.
Trade-off (keynesian thought):
1. Policies to reduce employment, but they were increasing inflation
2. Decrease inflation, and increase unemployment
In the oil crisis, the world was suffering stanflation: high unemployment and high
inflation.
Monetarists didn’t agree with the Keynesian thought. They will supply new policies:
Supply Policies. They want to increase productivity, the efficiency.
One of the recommendations was to privatise. Competitive market, regulation and
liberalisation. And the last: stabilisation of the economy.
This is why we call this school monetarism, because monetary variables are crucial.
One of the fathers of monetarism is Milton Friedman (school of Chicago).
Example: Pinochet in Chile, was following an extreme version of monetarism.
Neoliberalists would also follow a monetarist thought.

Post-Keynesianism:
They appeared in the 50s and 60s
Keynesianism +
1. Income distribution
2. Credit institutions
3. Unions and Multinationals
They updated the Keynesian thought: they added some new parameters like the role
of financial markets, the role of some institutions…
Hyman Minsky: his theory is Financial Instability. Capitalism is going to generate
insurance financial instability. Investing in the financial sector would maybe bring
more profit. The problem is that the financial sector is a key sector, we need to
connect savings and investors. In this second period (advanced capitalised period)
the financial sector is not going to play the traditional role. It becomes a speculative
mechanism. This capitals are not being invested in real economy (manufactured
sector etc.). The issue is that the capitals invested are also speculatives, so they will
be retired. A bubble is created: speculatives capitals can leave the financial market
in one day.
This theory can explain the last crisis.

10/1/2019
Institutionalism:
Institutions (values, habits…) play a key role in the long term
Old Institutional Economics (T.Veblen) and New Institutional Economics (R.Coase
and D.North)

They consider that institutions are crucial.

The difference with pot-keynesianism, is: Thorstein Veblen “The theory of the leisure
class”, 1899.
They are trying to understand individual behavior (ex: lets understand the behavior of
consumers). Individual behavior is explained by the institutions (common rules,
society…). They reject the methodological individualism.
However, this is not going to be the case of New Institutional Economics: individuals
are the ones who creates institutions. the key question is: What type of institution
should we created if we want to maximise the social wealth fair ?

5.Economic Systems

One economics system are the group of societies that are sharing the same mode
of production.
A mode of production is one specific way of society produce, consume and
distribute.
Compare Capitalism and Socialism.

What are the key principles?

Capitalism: individual freedom and efficiency is the key principle.
Socialism: equity and social justice.

What is the political organisation ?

Capitalism: Multi party political system or one party political system.
Socialism: One party political system.

Who is the owner of the productive factors ?

Capitalism: private owners mostly.
Socialism: most of properties are owned by the state or the society.
The difference has to do with who will get the profit. The profits of the social property
is not the whole society. The workers are also the owners. In private property we
distinguish workers and owners.

The main goal of the socialist model is not to get profit. The government is planning
loses for a company.
In a socialist economy we follow a plan: we decide how much companies are going
to produce, the price, who is going to consume etc. Then we also decide the
objective of the companies.

In the capitalist model most of the decisions are made by markets (ex:prices). If we
want to maximise efficiency we should force the competition.
We can have high unemployment in a capitalist model, which does not happen in a
socialist system, although they have underemployment: the workers are not using
their full capacities (ex: to press an elevator çbutton: it is something I can do myself).
What is the value an underemployed person is making ? Nothing
Social inequalities are accepted in a capitalist model. Socialists prefer having a low
income, and a lower efficiency than social inequalities.
Inflation can not be high in a socialist economy, because everything is controlled, but
some queues are created: the price won’t change with the demand but you have to
be the first one to get the product. It creates black market.

Soft financial restrictions/Soft monetary restriction: in a socialist system you don’t

have to close a company if you are making loses.
The main challenge is to make the system sustainable.

10/7/2019

Unit 2: Markets and State Intervention

Can governments impede bubbles ?

1. Demand:

Demand: How many products, consumers are willing to buy at any given price.

Decreasing marginal utility: negative relationship between price and quantity

demanded.
The demand law say that the higher the price the lower the quantity demanded,
other things equal.
Negative law (curve decreasing) and positive law (curve increasing). The only
variable in this theory is the price. Maximum consumption is the quantity demanded.
If the price is 0 then the maximum consumption would be maximised. Elasticity is
showing how sensitive consumers are to changes in prices. When we have an
elasticity that it near 0 it means that the product is quite inelastic. Elastic goods are
goods that are considered basics.

1. 1. Shifts of Demand Curve:

When the amount of product that buyers are willing to buy at any given price go up
or down
This changes are not related to the price.

Five principal factors:

1) Changes in the prices of related goods or services:

Related goods are goods with a demand that also depends on the price of
other products:
1-Substitutes goods are those goods who are serving for the same need (ex:
Coke and Pepsi are substitute because they are competing).
For substitutes, the higher the price of product A the higher the demand of
product B (also works in the other way).
2-Complements goods: the consumption of those goods is needed to meet
the need (ex: cars and gasoline).
For complements goods it is the opposite as substitutes.
3-Independents are those goods who are not related.

2) Changes in income:
Normally, the higher the income, the higher the consumption. However there
are other goods that are called inferior and behave differently: the higher the
income the lower the consumption (ex: palm oil).

3) Changes in tastes:
Tastes can be influenced by advertisement, for example. Tastes can also
change against the goods.

4) Changes in expectations:

5) Changes in the number of consumers:

More consumers in the market can explain some increases in the demand.

2. Supply:

Quantity of goods that suppliers are willing to offer at any given price.
It reflects the positive relationship between price and quantity supplied (increasing
marginal costs).
The higher the price, the higher the quantity (ex: housing market).

10/8/2019

2.1 Shifts of supply curve

When the amount of product that suppliers are willing to sell at any given price go up
or down.

The change in the quantity is not explained by the price of the product.

Five principal factors:

1) Changes in inputs factors: If we have to pay for higher materials, our price
increases. If we want to maintain the profit rate, we have to also increase the
price of our product.
2) Changes in the prices of related goods or services: For suppliers that are
production different products, and the price of one or some of them increase,
the suppliers are going to supply a higher quantity of this products, and a
lower quantity of the other products.
3) Changes in technology: Lower unit cost.
4) Changes in expectations: If the price of our product is expected of
increasing in the next years, we are going to store our product.
5) Changes in the number of products: The investment will be higher in
companies that supply the more units.

3.Elasticities:
It measures how much a variable changes when another variable changes.

There are 4 main elasticities:

a) Price elasticity of demand:
How sensitive consumers are to changes in prices. A very high number
means it is elastic, and a result lower than 1 is inelastic. 0 means it’s perfectly
inelastic.
b) Cross-price elasticity of demand: It measures how much the demanded
quantity of product A changes as the price of product B changes. If the result
of the elasticity is positive, my products are substitutes. If the result is
negative, it is a relationship of complement goods. Finally if it is close to 0 it
means they are independent.
 c) Income elasticity of demand: It measures how much the demanded quantity of
a product changes as income changes.
d) Price elasticity of supply: It measures how much the supplied quantity
changes as prices change.
10/14/2019
(see aksel’s mail)
1. Markets: Equilibrium, disequilibrium and structures
Markets are where exchanges are done
Agents; behavior is based on individual rationality
How equilibrium and disequilibrium are determined, depends on the type of
markets.
Either:
● Perfect competition
● Imperfect competition

4.1. Perfect competition

What governments should desire
Assumptions:
Many buyers and many sellers
Individual decisions will not affect the equilibrium
Homogenous products
Car market (for a specific car) - Not analyzing a wide variety of
products
Free entry and exit
No restrictions on starting or stopping production
No state intervention
Individual decisions not affected by state regulations
Perfect information
For the seller, supplier and consumer
All information available

A) Equilibrium
The price at which the quantity, consumers are willing to buy coincides
with the quantity are willing to supply
When the answer of the price buyers and sellers are willing to sell
the same amount of products

B) Disequilibrium
More products available than amount of purchases
Excess supply
Low price: More demand than available supply
Excess demand (shortage of supply)
If markets are competitive, these disequilibrium will correct themselves

If we have an excess supply in a market with perfect competition it will correct itself
The invisible hand
Aggregation of multiple individual decisions
4.1.1. Shifts in perfect competition
a) Shifts in demand
Ex: Increase in income
Demand curve shifts to the right
Excess demand, but consumers are willing to buy at
a higher price
New equilibrium

Ex: Change in technology allow suppliers to sell at a lower price

Supply curve shifts to the right
.....

When we are shifting one or more curves, we are shifting the

equilibrium

10/15/2019
4.2. Imperfect competition and market failures

Some of the previous assumptions are not fulfilled in the real world:
a)Few buyers or sellers

10/21/2019
Market power is the capacity to affect the price.
Markets with one or few consumers: weapons, aircraft, … when a state has market
power.

Monopoly/Oligopoly (watch powerpoint)

MR=Marginal Revenues are those additional revenues that companies get after
producing one more unit.

ex:

P Qd TR MR

10 10 10*10=100
9.5 11 9.5*11=104.5 4.5
9 12 9*12=108 3.5
Marginal Cost is the additional unit cost that companies are assuming after
producing one more unit.

Diminishing/Decreasing Return Law (DRL) if only one input is increased, the

marginal output will decrease.
The unit cost (UC) is the total cost divided by the number of units.
The last unit monopolies or oligopolies are going to produce is the last unit that
makes profit.
The producer surplus is the difference between the price that they were willing to
charge and the price that they are actually charging.

Reasons for Market Power:

Why markets are becoming monopolist ?
1) Capital accumulation (typical of Capitalism)
Companies are becoming bigger because they are reinvesting their profit, but
as I want to maximise my profit, I can buy your companie. In a crisis, small
companies are more likely to die.

2) Control of strategic inputs

3) Barriers to entry
Legal: patents, licences…
Technological:
Economic: economies of scales
(Licences,...)

4) Product differentiation

10/22/2019
Economies of Scale: unit cost reduction that occur when companies increase
their size. (UC=total cost divided by the quantity)

b) Products are not homogenous normally

c) There are barriers to entry (technological, legal, economic…)
d) State intervention is needed in some cases (some minimum state intervention is
necessary)
d) Information is imperfect (asymmetric)
Prices don’t reflect marginal utilities (not based in perfect information)
The value of the model has to do with the predictive capability.
The consumers try to maximise their utility, my society tries to maximise its profit. (If
you get more money you consume more). There are many aspects that can explain
behaviors.

J.K. Arrow “a social decision system based on individual preferences can’t be

satisfactory for all agents.”
In neoclassical economy, social preferences are based on individual preferences. He
tries to demonstrate logical contradictions.

Other economists reject that prices are determined by utility (satisfaction) because of
its subjectivity:

● We can see same prices for different utilities.

● The labor theory of value: Socially Necessary Labour Time.

Markets does not always correct disequilibrium through changes in prices (rigidity of
prices). In the crises, the prices don’t necessarily raise, but the entrepreneurs fire
employes.

Neoclassical model does not consider distribution problems → Invisible queues.

5. Externalities and Public Goods

Externalities are the positive or negative effects of the activity of firms that are not
internalized.

What justifies a state intervention ?

Characteristics of public goods:

1. .
2. Some people who don’t pay for a service and can’t be excluded (ex: street
lights). We don’t have to compete. Private companies can’t supply this type of
goods.

6. The role of Government and Economic Policy

What are gonna be the main roles of the states in the economic activity ?

1. To produce goods and services

2. To stabilize the economy (ex: when we have an inflation)
3. To regulate the economic activity (to create laws, limits)
 4. To ensure equal opportunity (doubt: it is not assumed the same way in
different school of thoughts)

10/28/2019

6.The role of the state in the economy:

To produce goods and services: Goods that should be provided by the state: public
goods.
To stabilize the economy
To regulate the economy
To ensure opportunities

This roles changed during History. (see powerpoint)

11/26/2019
7.Theories of unemployment
The supply creates its own demand. We don’t have to be worried about the lack of
demand (Jean Baptiste)

(...)

Problem of lack of demand: the government have to assume a very active role.

Marxist approach:
What is the nature of unemployment ?
Derives from the nature of the capitalist system. Not a temporal problem. Because
the central objective is to maximise profit. By doing this we are going to maximise
capital, and when possible reduce salaries, which is very common in crisis. It’s
because of the existence of unemployment that capitalists can control salaries.

8.Employment policies
How can we create employment ?
It depends.

“Loi Aubry”
 10/29/2019

Unit 3: Aggregate magnitudes and Fiscal Policy

Should Governments avoid Budget deficits ?

1.Aggregate magnitudes

1) Aggregate demand
Price level=weighted average
GDP (Gross Domestic Product)(x) and Price level (average price in my economy)(y).
AD curve decreasing. The higher the price, the lower the demanded quantity.

Consumers are the first source of demand, but it’s not the only one. Investment is a
second source of demand. The public administration can also buy products.

In general in economy:
● M=imports
● X=exports

a) Consumption (Keynesian analysis)

Consumption depends positively on Disposable Income (Yd). The higher the income,
the higher the consumption. BUT this increase is not going to proportional.
Criticism to Keynesian analysis of consumption:
● By J.Duesenberry: “If we want to understand our current consumption we
need to understand our past consumption.” Our habits are a result of a social
context.
● By M.Friedman and F.Modigliani: the determinant variable is the future
income. If we are making decision in the present we are also considering our
future income. (ex.Student loans/Students borrowing money, when they feel
confident in their future (medicine students)

Other determinants: wealth, income, distribution, interest rate, price expectations and
taxes among others.

11/4/2019
b) Investment

Capital goods: those goods that are used in producing other goods, rather than to
satisfy needs.

It’s part of the total product devoted to buy capital goods -> Capital Stock.
More volatile (unstable) than consumption. It has to do with utility. (ex.If my profit
prospects are negative. Is an investor going to be interested in investing in my
production ?)

If we want to understand the effect of investment: Multiplier effect

Final income rise = investment*(1/1-MPC), with MPC>1. Therefore Final income
rise>investment. (MPC= marginal propensity to consume).

(Ex. I am an investor who invest 1M$.

I=1M
With this investment we are buying: raw materials, machines, salaries, making
profits…
100.000 goes to raw materials, and the MPC is 0.8 (80.000$).
We are generating new consumptions depending on the MPC. The higher the MPC,
the higher the effect).

It depends on prospects:
● Investing just to cover my depreciation. I’m investing just to replace my
machines because they have achieved their life cycle. Therefore we are just
substituting previous investments. In this case we are not increasing our
capital stock.
 ● Investment>depreciation -> Capital accumulation. I am replacing my
machines but I add two more.
● Investment<depreciation -> disinvestment

1.2.Aggregate Supply

It shows the amount of products and services that are supplied at any price
level.

It has 4 determinants/variables:

a) Labour <- Economically Active Population. If we have more people working,

we have more production.
b) Capital stock <- Accumulated Net Investment. Diminishing Return Law
(according to Classical economics): (DMarginalProductivity) If we are just
increasing one of the producing factors then the productivity decreases (ex.
Sharing machines). Although the supply curve is positive.
c) Technology. More modern machines.
d) Efficiency/Potential Production. (Ratio between Output and Input: producing
more with the same materials or producing the same with less materials).

What is the efficiency of my economy ?

Different increases than technology. (ex. Education, Institutions…)
This explains my potential production. The maximum production that I can
achieve with my current resources is because maybe my efficiency is not high
enough. (?)

Aggregate supply curve (powerpoint)

Keynes disagree with this conception of the AS curve.

1.3.Aggregate Economy

a) Neoclassical model
(graph powerpoint)
The economy is going to have full employment if we don’t have state
intervention. They rely in the power of prices and flexibility.

b) Keynesian Model
“In the long run (the vertical line of the AS will disappear) we will all be
dead.” We need the state Policies to avoid the vertical curve of AS. He
rejects flexibility of prices.
2.Public Sector

It’s divided into 3 parts:

a) Public Administrations: Central and Territorial. Managing public

services.
b) Public Companies.
c) Public Financial Sector. ex. Central Bank

11/5/2019
3. Public budget
It’s a plan of expected incomes and expenditures for the upcoming fiscal year.

Incomes:
● Sales of Public Companies
Few public companies. But if these companies are getting profit, who is gonna
be the owner of this profit ? The owner is the state. This profit will be part of
public income.
● Taxes: Mandatory financial charges that are imposed by governments. Most
important source of public incomes.
a) According to what is taxed
Direct and Indirect taxes. Direct taxes are directly taxes from income,
wealth and profits. Does not depend on your decision. Indirect taxes
come from transactions. The valuable tax taxes consumption. (TVA)
b) According to the proportion taxed
Progressive, regressive and proportional taxes.
(ex. 2000 a month and a 20% tax. 20% is the tax rate and the taxable
amount is 2000.)
Progressive taxes: those taxes in which the tax rate increases as the
taxable amount increases.
Regressive taxes:
Proportional taxes:
● Public Debt

Expenditures:
● Investment: gross expenditure that half the vocation of lasting more than 1
year (ex. If you buy a machine or build a University)
● Current exp.: goods and services that are consumed within the year (ex.Office
Supplies)

Public budget
Public incomes
Public expenditures

11/11/2019
If investors perceive that investing in your country is risky, they will ask for a higher
interest.
Country risk, depends on the fiscal debt.

(powerpoint public budget schema)

If there is Fiscal Deficit: treasury bill, public bones. Borrowing from citizens or other
countries. (ex. China and US)

Public Debt: the higher the PD, the higher the “price” (interest).

4.Fiscal Policy
a) Resource allocation: (ex. Tobacco, we can increase the tax rate for this
product to reduce the consumption) Fiscal policy is used to discourage. (ex.
Public transport, lower tax rate with the objective to encourage the
consumption of public transports) Fiscal policy is used to encourage.

b) Income redistribution: first market or primary income distribution and

secondary income distribution.
In the first case the market is deciding how the income is distributed/salaries.
In the second case, we can think that this is not socially acceptable, because
it creates high inequalities. Thus the state creates laws or institutions to
reduce this inequality: redistribution. Tax policies are not the only way of
reducing this inequalities. Trade unions (labor organisation that are
negotiating the salaries) reduce inequalities before the market redistribution:
predistribution. Public education can also reduce inequalities.

c) Stabilization: the correction of equilibriums. (4 components of the aggregate

demand: consumption, investment, public expenditure, net exports).
According to keynesian thoughts, government should fix the problems of their
economy. If you are facing a very high inflation, this policy is not valid, but it is
for unemployment, for example.
 d) Economic Growth and Development: We need to increase investment to
accumulate more capital.

4.1. Fiscal multiplier

If you invest, you are buying new products, generating new sales,... snowball effect.

11/12/2019
4.2 Fiscal Policy Tools
Fiscal policies try to shift the demand to the left.
Expansionary Policy (expansionary means that we are expanding the demand)
Different fiscal policy implement different effects: Expansionary and contractionary.

Why can we shift that demand if we lower taxes ?

People have more money, therefore will consume more.

Is public expenditure remaining constant in a crisis ?

US and Europe, public expenditure. US implemented a very expansionary policy and

dealt with the crisis in 1 year. However, in Europe, a new common policy was
created:
The aggregate demand of European country shifted to the left, and unemployment
rose. This is how the crisis lasted enve more.

4.3 Welfare State and Social Expenditure

a) Big differences among countries

b) There is not a consensus about the effect of Social Expenditure on Economic
and Productivity growth in the long run

Neoclassical school:

Fiscal deficit + fiscal debts = inflation/devaluation

The type of countries that could implement social policies: one of the conclusion of
neoclassical countries is that poor countries cannot afford social policies (ex. Social
Substitutes). This is because they don’t have enough resources.
Non productive expenditure: government has few resources, and invest them in
productivity. However, if you use this resources to create schools or hospital, they
are called “non productive”. Because they do not increase the supply nor the
productivity.
Criticism to Neoclassical approach: Social services make workers.

11/18/2019

Unit 4: Money and Monetary Policy

Can countries increase their GDP by printing more money ?

1.Money
Anything (over History we can see that very different products can be used as
money) that is accepted as a mean of exchange.
Money is an important social innovation. It reduces the transaction cost.
Probability of coincidence of demand (ex.Food and clothes)
Store of value (stability). If the value of money is going to be the same in a year or
not.

2.The Creation of Money

By making money we increase the supply.
2 Different agents:
● Central Bank (monopoly, it’s the institution that can print money). It can
increase the supply of money, and put it in circulation:
1. by lending money to commercial banks
2. by purchasing financial assets. Secondary markets, where different
financial assets are sold. With this transactions people have more
money and the bank more financial assets.
 ● Commercial Bank: reserve ratio (the fraction of deposits that commercial
banks have to hold on). It is imposed by the central bank. There is a law in our
countries that is imposing a percentage of this deposits that bank (powerpoint
example).

3. The financial system

Financial assets intail the recognition of a debt.
It reduces the transaction cost.
There are 3 characteristics:
1. Liquidity: degree at which financial assets can be transformed into cash.
Do I have to wait or not ?
The financial penalty: selling your asset in time.
2. Security: the probabilities of getting back the money. The first thing that we
should to is analyse the economic capacity of the borrower.
3. Yield: determined by liquidity and security. It is the amount in cash that is paid
to the owners of a financial asset. This amount is normally expressed as a
percentage.
The lower the liquidity, the higher the yield (If I have to wait, you have to pay
me more).
The lower the security, the higher the yield. Otherwise, I am not going to
ensure the risk.

4. The Demand of Money

The price of money is an interest rate. The higher the interest rate, the lower the
demand.
Keynesian view: 3 different reasons for demanding money:
1. Transaction motives: we are going to ask for money because of the lack of
synchronisation between payments and receipts. You have to pay something
before you get paid.
2. Speculative motives: we want to take advantage for investment opportunities
(we could also call them investment motives).
3. Precautionary motives: maybe we are interested in holding money to faith
some unexpected events. To feel more confident.

5. The Supply of Money

It’s the stock of currency and other liquid instruments circulating in a country (M1) (in
the States it’s not M1 but M0).
M1=coins, notes and checking accounts (these accounts that we are using for our
dayling consumptions, you don’t have financial penalties).
M2=includes M1 but also includes saving accounts. Saving accounts are also quite
liquid.
M3=includes M2 but also includes deposits certificates. In this case, the liquidity is
going to be lower because the money is going to be tied up for a preset period. This
due date is the time that you have to wait if you don’t want to get financial penalties.
M4=includes M3 but also includes other liquid assets. In this category we are
including the least liquid assets.

11/19/2019
6.The Monetary Market
In this case we only have one producer.
Increasing (shifting the supply to the right) or reducing (shifting the demand the left)
the supply of demand controls inflation.

7.Quantitative Theory of Money

Irving Fisher
Velocity of Money: How fast money passes from one holder to the next.
V=GDP / M

Quantitative theory: The general price level of goods and services is directly
proportional to the amount of money in circulation.
M*V=P*Q (Q is not constant)
8. The monetary Policy
Changes in the supply of money and interest rates geared to affect inflation, GDP
and unemployment. (more Keynesian, for Neoclassicals we shouldn’t use monetary
Policy)

If we reduce the reserve ratio, we increase the supply of money.

8.1 Effects on the Aggregate Market

Keynes thinks that the monetary supply can affect other variables. (ex.
Neoclassicals author think that it mostly increases inflation (Quantitative theory)

AD has 4 components:
How can the monetary supply shift this aggregate demand ?
If we put more money in circulation people have more money to consume, and
investors can invest more. The GDP will be higher, the employment will be higher.
(expansionary policies)
However if you have problems with inflation, you can’t apply this policy.

Define the problem of unemployment, GDP or inflation…

Then find the type of monetary policy (expansionary or contractionary) powerpoint
graph 8.1
Finally find the tool
(exam)

11/25/2019

Unit 5. Employment and unemployment

How can full employment be achieved ?

Around 5% unemployment is considered “full employment”.

Investing in education increases productivity but not necessarily employment.

1.Labor and population

Economically active population: either working or seeking for a job.
● Employed population: those individuals that are working.
● Unemployed population: those individuals who are not working but are looking
for a job. Active actitude. They want to work but the type of work they find
doesn’t match with their capacities.

Inactive population: not working nor seeking for a job (ex. retires).

2. Types of unemployment
Frictional: people who take some time to move from one job to another. Not very
problematic.
Seasonal: the demand varies over the course of the year. For some economists this
a kind of “structural” unemployment. It has to do with a specific skills that is not
always required in the labour market.
Cyclical: associated with economic crisis, with the economic cycle. When employers
fire people because they don’t need so much production.
Structural:
1. .
2. In this case maybe we have opportunities.
3. los fganseses somos log mejoges

3.the supply of labour

The amount of labour that workers are willing to offer at any wage (neoclassical
approach).
The price of work is the wage, salary.
Neoclassical think that people are very rational: if I have some good wage, I’ll get
some products.
On the one hand, individuals consider the utility that they get with their products or
services that they buy with their salaries.
On the other hand they consider the utility that they get with their spare time, free
time.
Then they decide how much they want to work.
How to change the supply of labour ?

4.The demand of labour

Companies that are demanding labour:
1. Neoclassical approach: comparing the quantity and the price. Criterias to
choosing a specific amount of labour. The entrepreneurs demand that the
marginal productivity and wages coïncide.
If we increase only one of the production factors, like labour, the final outcome
will decrease.
Companies are price accepting: they cannot change the market price
(competitive market).

el dinero no da la happiness loko

profeee materialistaaa fak k pitalism

2. Keynesian approach: when entrepreneurs fire workers when they get into a
crisis. The demand of labour is a “derived” demand.

5.The labour market

Neoclassical approach
Labour market are going to work in the same way. If they are competitive we are
going to have an “invisible hand” that will correct the equilibrium.

6.Theories of unemployment
Minimum wage: it is a distortion, the invisible hand can’t happen.

ha dicho war japen

 Unit 6: Inflation

If high inflation is bad, then… is deflation good ?

1.What’s inflation
The rate at which the general level of prices for goods and services is rising
If the inflation is 2%, it means that the level of prices is 2% higher.

2.How do we measure inflation ?

1) Statistical Offices choose representative goods and services.
2) These goods are weighted by its importance in the market basket. (By asking
households what they buy/use)
3) The price of these goods and services is compared over time.
4) A price index is calculated

Inflation rate is a growth rate.

3. Measures of Inflation
Consumer Price Index (CPI) -> market basket: asking people how many products
are you buying.
Core inflation (calculated through the price of all the products minus energy and food
products). If this rate is 2% and the CPI is 10%,

12/2/2019
4. Types of inflation
Demand pull Inflation: Increased AD > Increased AS
Cost Pull Inflation: Rise in the price of Raw Materials. (ex. If you have to pay higher
price for oil, you have to increase the price to keep your profit rate).

a) Demand pull inflation: (graph powerpoint)

Supply curve shift to the left: ask higher prices in demand.

5. Determining factors of Inflation:

(powerpoint)
-Technological progress: less workers, lower prices… can reduce inflation.
-Productive structure: structural inflation. What type of products are you
producing/exporting ?
12/3/2019
Devaluation creates inflation.
6. Deflation
Effects:
● It’s a decrease in the general price liver of goods and services (negative
inflation rate).
● It increases the purchasing power of money. How many things I can buy with
my money
● It increases the external competitiveness. Can we compete with the others or
not ? My product prices are cheaper so I’ll sell more units.
● It increases the real value of debt.

Tax rate doesn’t change but applies to lower prices.

7. Inflationary spiral
Self reinforcing process: inflation that regenerates more inflation.
Because of inflation real wages are going down, because the purchasing power or
real wages is going down.

8. Deflation spiral
 12/9/2019

Unit 7. Economic Cycle and Economic Growth

Why do nations fail ?

1. Economic Growth
There are different ways of measuring it.

Types:
● GDP and GNP (Growth National Product).
GDP is measuring the value of all the products and services that are
produced in the domestic market by national companies but also by foreign
companies.
GNP is measuring the value of all the products and services that are
produced by national companies in the domestic market or abroad.
● GDP per capita. Determines the living conditions of a population.
● Potential GDP. The highest GDP that one country can produce with the
current resources.

The difference between nominal and real GDP:

● Nominal: the number of units produced and the price of those units (to get the
national revenues we need to multiply quantity and price).
● Real:

PPP (Purchase in Power Parity)

GPP ()
To compare two countries you might use PPP and GPP.

PPF (Production Possibility Frontier) graph

2. Historical perspective
viva pablo iglesias #podem

Samuel Huntington (The Great Divergence).

3. Theories of Economic Growth

Classical economists:
Decreasing Return Law: if you increase one of the production factors, it will resort in
a less proportional increase in the outputs.

Marginalism: worried about short run equilibrium.

Keynesianism: (in the long term all of us are dead) Worried about short run growth
and crisis.

The Modern Theory of Economic Growth: High level of formality (mathematical

models)
● Exogenous Growth Models : We can not control. Neoclassical ideas. But,
these ideas are now formulated by mathematical models.
● Endogenous Growth Models: we can control and force economic growth in
the long term). Other factors like education, institutions… Governments can
increase global productivity by forcering some key factors.

4. Determining Factors of Economic Growth

(powerpoint)
Capital: more investment, more production. Constant increases ?
International trade: if we open the economy we can sell more to produce more.
Fixing local demand problems.
Education: human capital.
Institutions: legal systems. Make investors invest because they need regulations
(laws, banks…)
irene montero y pablito iglesias

D.Acemoglu “Why Nations fail ?”.

The Dutch disease. An important increase of one exporting sector can generate the
decline of the rest of the exporting sectors.

pablo lo hizo

12/10/2019
5. Business Cycles
Divided into 4 stages: declines and increases are general.
● Expansion: period in which the GDP increases.
● Peak: the highest level of GDP. It’s the beginning of the Recession.
● Recession: period where the GDP declines.
● Trough: the lowest level of GDP the economy is going to achieve. It’s also the
beginning of the expansion.
There are 3 types of cycles (length):
1. Short-term cycle (Kitchin): from 2 to 4 years, it results from the changes in
business inventories. Temporary cycle. People stop buying.
2. Medium-term cycle (economic): from 7 to 11 years, it refers to new business
investment. Investors stop investing. The problem comes from your
productive capacity. It’s higher than necessary in that moment.
3. Long-term cycle (Kondratiev): from 30 to 50 years, it results from the
technological innovation. “High Growth waves”. Industrial revolution: steam
engines. High investment because investors want to change the technology.

(powerpoint graph)

6. Economic Crisis
Different school of thoughts:
● Monetarist: Due to the credit cycle. Markets are unstable because of the
“invisible hand”. But there is an exogenous variable,
● Keynesian: Due to the instability of investment. Profit prospects.
● Marxist: If we want to maximise the surplus: capitalist are going to invest their
profits. C=constant capital (replacing machines because of depreciation),
V=wages capital and S is the surplus (profits). After reinvesting my profits, the
production capacity is higher.
Periodical crisis:

Financiarisation:

7. Degrowth theory
Georgescu Roegen et Serge Latouche
We have to change central objectives.
“good life”
Maybe there is a relationship between economic growth and the concept of “good
life”, but also satisfiers. Economic growth is in conflict with satisfiers.
 12/16/2019

Unit. 8: Inequality

Is inequality a problem?

1. What’s inequality?
Different social, political and/or economic situation of individuals or territories, that
affects their current or future development.

Neoclassical: Inequality is not a problem, and can even be considered incentive

(positive).

Keynesian: It reduces the internal demand. MPC decreases with income.

Marxist:

2. Types of inequality
Individual:

Subgroup: Position in society.

If you are socially excluded, your possibilities of getting a job are much lower.
Political exclusion.

Economic inequality: distinguishing with income/wealth inequality.

2.1 Opportunity equality vs equality of results

Opportunity inequality -> Rawls
Result of efforts -> Fair inequality.
Everybody is starting from the same point.

Pre-distribute inequality: reducing before the market distribution. Public schools,

trade unions.

3. Main indicators
Deciles: Comparing purcentages of the total income.

GINI Coefficient: Measures the distance between the “diagonal” and the Lorenz
Curve. 0=maximum equality and 1=maximum inequality
Lorenz Curve: graph

4. Causes
Multicausality

5. Effects
This devaluation of the liberal-democracy and rise of far-right parties are effects of
inequalities. Workers are disappointed with globalisation. Real wage remains
constant.

Elephant graphs -> Branko Milanovic

Exam has 2 parts:
1. Text with 3-4 short questions. At least one of them is related to the content.
5pts
2. 2 or 3 questions and chose 1 or 2 of them. 5pts