Crash Course: Economics

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#1
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Intro to Economics

Economics is study of people and choices.

Opportunity Cost:
The value of next best opportunity.

Assumptions in Econ:
a. Scarcity:
The tension between infinite wants and finite resources.

b. Everything has a cost.

Every solution have benefits and cost.

Analize our choices and get most from the limited resources.

Govt. use economical theories to guide public policies.

Policies are driven by incentives.

Incentives:
A set of external motivators that explains people's choices.

Macroeconomics:
The study of production, employment, prices, and policies on a nationwide scale.

Microeconomics:
The study of how consumers, workers, and firms interact to generate outcomes
in specific markets.

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#2
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Specialization and Trade

Progress of humanity through out history:

a. Life Expectancy
b. Child Mortality
c. Income per capita

Industrial revolution leads to people having significant and sustained standard

of living.

Specialization makes the country prosperous. It makes people more productive.

Trading enables to seek more opportunities than the area of specialization.

Specialization and Trade makes the world better off.

Production Possibilities Frontier (PPF) Graphs.

Individuals and countries should specialize in producing things in which they

have a comparative advantage and then trade with other countries that
specialize in something else. This trade is mutually beneficial.
Countries cut off from world (Trade) are less economical countries. For e.g Iran

Self Efficiency is inefficiency and inefficiency can lead to poverty.

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#3
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Economic Systems

Economic systems has three figures:

a. What will be produce?
b. How will we produce it?
c. Who gets it?

Two difference economic systems:

a. Market Economy
b. Planned Economy

Economy is defined by who owns and controls the factors of production. These are
major inputs required to produce stuff like land, labour, and capital.

Planned Economy:
Govt. controls the factors of production.

In both communism and socialism, there is economic planning, and the govt. helps
decide what to produce, how to produce, and who gets it.

Command Economy: Extreme case of planned economy. Govt. controls everything.

Free Market (Capitalist) Economy:

Individuals own the factors of production.

Invisible Hand:
The unintended social benefits resulting from individuals actions.

Invisible hand of the free market is the idea that individuals and businesses
meet society's needs when they seek their own self-interest.

Free market limitations:

a. Maintaining the rule of law
b. Public good and services, like road, bridges, education, and defense.
c. Market get things wrong, like pollution emission, regulating production.

Modern economies are neither completely free market nor planned. There's a spectrum
of govt. involvement.

North Korea is command economy.

New Zealand is free market economy.
In the middle, we have the rest of the world.

The Circular Flow Model:

Modern economy is made up of
a. Households
b. Businesses
c. Govt.

Businesses sell goods and services to households in the product market.

Households earn the money by selling the resources, like labor, to businesses in
resource market.
The business use the money they earn in product market to pay for resources in the
resource market.

Govt. also buys products and resources.

Govt. get the money from taxing households and businesses, and borrowing.

There are no solutions, only trade-offs.

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#4
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Supply and Demand

Market:
Any place where buyers and sellers meet to exchange goods and services.

Market involves voluntary exchange.

Price Signals:
The information that markets generate to guide the distribution of resources.

Supply and demand curve:

If supply is greater than demand, then it's a surplus
If demand is greater than supply, then it's a shortage
If supply is equal to demand, then it's equilibrium.

Four market behaviours:

a. Supply can increase
b. Supply can decrease
c. Demand can increase
d. Demand can decrease

Market concept should not be used during emergencies, ethical situations.

Market must be regulated.

Economists and politicians often refer to the interaction of supply and demand as
laws.

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#5
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Macroeconomics

The study of the entire economy as a whole rather than individual markets.
Such as unemployment, inflation, interest rates, and govt. policies.

Macroeconomics came after 1930 great depression.

Macroeconomists make predictions based on data, theoretical models and historical

trends.

In economics, it's nearly impossible to control all the different variables.

Policy makers have three economic goals:

a. Keep the economy growing over time
b. Limit unemployment
c. Keep prices stable

Three specific measurements to see if a country is achieving above goals:

a. Gross Domestic Product
b. Unemployment Rate
c. Inflation Rate

GDP is the value of all final goods and services produced within a country's
border in a specific period of time, usually a year.

GDP doesn't include all the transaction occuring inside a country. For e.g
a company buying another company. It also doesn't include illegal activity.

Real GDP, which is adjusted for inflation.

Recession happends when two successive quarters, or six months shows a decrease
in real GDP.

Depression is a severe recession.

Unemployment rate = # Unemployed people / # of people in labour force * 100

The official unemployment rate underestimates the problems in the labour market.

Three types of unemployment:

a. Frictional unemployment: The time period between jobs when a worker is searching
for, or transitioning from one job to another.
b. Structural unemployment: Caused by lack of demand for a worker's specific type
of
labor.
c. Cyclical unemployment: Unemployment due to recession.

Goal is to have no cyclical unemployment.

GDP and unemployment rate are inversely proportional.

Inflation: An increase in a currency supply relative to the number of people using

it,
resulting in rising prices of goods and services over time.

Deflation: A decrease in the general level of good and services.

Inflation is measured by tracking the prices of a set amount of commonly purchased

items, known as market basket.

The inflation rate is the percent change in the price of that basket over time.

Too much inflation is bad because it decreases the purchasing power of the money.
Deflation discourage people from spending since they might expect prices to fall
more in the future. Less spending in the economy means GDP is gonna decrease
and unemployment's gonna increase.

Components of GDP:
a. Consumer spending
b. Business spending
c. Govt. spending
d. Net exports
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#6
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Productivity and Growth

Why some countries are rich and some are poor?

GDP per capita is used to determine how wealthy a country is.

GDP of the country divided by its population.

GDP per capita is used to determine the standard of living.

GDP is affected by
Natural resources
Govt.
Productivity: Ability to produce more output, per worker, per hour.

Factors of production:
a. Land
b. Labor
c. Capital
d. Human Capital

Connectivity = Productivity

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#7
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Inflation and Bubbles and Tulips

Purchasing Power:
The amount of physical goods and services that can be bought by a given amount of
money.

Rise in prices = Cut in wages

Bubbles:
A market phenomenon characterized by surges in asset prices to levels significant
above the fundamental value of that asset.

Consumer basket is used to calculate inflation rate.

Consumer Price Index: A statistical estimate constructed using the prices of a

sample of representative items whose prices are collected periodically.

"Real": Price from the past adjusted for inflation.

"Nominal": Price from the past hasn't been adjusted for inflation.

Being rich is not how much money you have, it's how much purchasing power you have.

What causes inflation:

Demand Pull Inflation - too much money chasing too few goods.
Cost Push Inflation - Shortage of goods by producers.

Speculation: Trading a financial instrument involves high risk, in expectation of

significant returns.
NINJA Loans:
No Interest, No Job, No Assets

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#8
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Fiscal Policy and Stimulus

Recessionary Gap:
A situation wherein the real GDP is lower than the potential GDP at the full
employment level.

Inflationary Gap:
Real GDP exceeds potential GDP.

Both are bad for economy.

High unemployment rate leads to higher

a. Suicide rate
b. Domestic violence
c. Social upheavel

Fiscal Policy:
The way a govt. adjusts its spending levels and tax rates to monitor and influence
a nation's economy.

The govt. alter the govt. spending or income using fiscal policies.

Fiscal policies acts as a stimulus to the macro economy of a country.

Stimulus has multiplier effect. Different policies has different multiplier effect.
Tax cut has 1 multiplier effect.
Construction of bridges and dams has 2.

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#9
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Deficits and Debts

Budget deficit is the amount by which a govt. spending exceeds its income over a
particular amount of time.

Govt. Income: Tax

Govt. Spending: Military, healthcare, pensions

Debt: accumulation of budget deficits.

Debt as a percent of GDP.

Our GDP grows every year, due to population growth and productivity increases,
and our ability to sustain debt grows along with our income.

Default: Unable to return debt

When govt. default its debt, the investors who loaned the govt. money lose
billions,
and the govt. loses all credibility, and it causes a massive recession.
Debt Ceiling: Limit on the amount of national debt that can be issued by the
treasury.

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#10
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Monetary Policy and the Federal Reserve

Federal Reserve is central bank of US. Central banks has two important jobs:
a. Regulate and oversee the nation's commerical banks.
b. Conduct monetary policy which is increasing or decreasing the money supply
to speed up or slow down the overall economy.

Interest Rate: The price of borrowing money.

Central bank directly or indirectly manuplates the interest rate for all kinds
of loans.

Expansionary Monetary Policy: Decrease the interest rate

Contractionary Monetary Policy: Increase the interest rate

Banks fails due to lack of liquid assets.

Liquid Assets:
An asset that can be converted into cash quickly and with minimal impact to the
price received.

Three ways monetary policies works:

a. When we save our money in bank, bank holds a portion of our money and loans rest
out. This is called reserve requirement.

b. Discount Rate is the interest rate at which banks takes loan from central bank.

c. Open market operations: Central bank buys or sells short term govt. bonds.

During 2008 recession, federal reserve used govt. bonds to lend money to banks.
Also, MBS and other securities.

Two ways economist speed up or slow down the economy:

a. Fiscal Policy: Changing govt. spending or taxes
b. Monetary Policy: Changing the money supply

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#11
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Money and Finance

Barter System: Exchaning goods with goods or services.

Purpose of money:
a. Medium of exchange
b. Store of value
c. Unit of account

Money is not only cash and coins, it is anything which is accepted as medium of
exchange.
In modern economy, money is digital.
Bitcoin is more speculative in nature, thus resulting in less useful in day to
day goods exchange.

In past, money could be exchange with same amount of gold, which was called
gold standard. Countries couldn't issue more money than its gold reserve.

Stock market is an piece of financial system.

Three key players:

a. Lenders: who have money and want to generate more money
b. Borrowers: who need money now and will repay it in future
c. Govt.

Financial System: A network of institutions, markets, and contracts that brings

lenders and borrowers together.

Three types of financial system:

a. Banks
b. Bonds
c. Stock Market

Banks and bonds deals with debt.

Stocks are equity.

Bonds and stocks are tradeable asset known as financial instrument.

Bonds are debt instruments.
Stocks are equity instruments.

Banks are financial institutions that conducts financial transactions such as

investments, loans, and deposits.

Financial system reduces the risk by spreading it amoung mutiple entities.

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#12
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Financial Crisis

Mortgage: House loan contract given to a bank by individuals, which stats that
every month individual has to pay small amount of principal and interest.

Default: When a debtor is unable to meet the legal obligation of debt repayment.

Banks oftens sells the mortgage to third party.

Mortgage Backed Security (MBS): Security build over large number of mortgages.
This process is known as securitization.

MBS got AAA ratings - the best of the best.

Subprime mortgages: A loan granted to individuals with poor credit ratings.

Collateralized Debt Obligations (CDO)

Problem happened by individuals default on the loans and housing price started
declining.
Credit Default Swaps (CDS): Sold against CDO and MBS.

Big financial institutions went to bankruptcy.

Govt. started TARP (Troubled Assets Relief Problem) to bailout the big financial
institutions.

Perverse Incentive: When a policy ends up having a negative effect, opposite of

what is intended.

Moral Hazard: When one person takes on more risk because someone else bears the
burden of that risk.

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#13
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Recession, Hyperinflation, and Stagflation

Hyperinflation:
When a country experiences a monthly inflation rate of over 50% or around 13000%
annual inflation.

Examples:
Germany (1923)
Zimbabwe (2007)
Hungary (1946)

Hyperinflation erodes wealth.

Reason of inflation:
Printing more money by govt.
Increase in velocity of money, i.e number of times a dollar is spent.

Depression: Real GDP is falling for multiple years

Stagflation: When output slows down or stops, or stagnates, at the same time that
price rise. Stagnant + Inflation = Stagflation

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#14
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Economic Schools of Thoughts

Economical theories are constantly being proven, disproven, and revised.

When both focus on what they're best at and then trade, everyone benefits.

a. Classical Economics

During recession it is necessary for the govt. to get involved by using monetary
and fiscal policy to increase output and decrease unemployement.

b. Keynesian Economics

Socialism:
System where means of producing and distributing goods is owned collectively
or by centralized govt.
c. Austrian School of Economics: Reject all monetary and fiscal policies

d. Chicago School of Economics

e. Monetarists:
Focused on price stability and argue that money supply should be increased slowly
and predictably to allow for the steady growth.

f. Supply-Side Economics: Deregulation and cutting taxes

g. New Neoclassical Synthesis

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#15
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Imports, Exports, and Exchange Rates

International Trade

Net Exports: The annual difference between a country's exports and imports.
Trade Surplus: Export > Import
Trade Deficit: Export < Import

It doesn't make sense to make everything on your own if you can trade with other
countries that have a comparative advantage.

International trade reshuffle the jobs from one sector to another.

Protectionism:
Placing high tariffs on imports and limiting the number of foreign goods to protect
local businesses.

Exchange Rate: How much your currency is worth when you trade it for another
country's currency.

Import and exports of a country changes its exchange rate.

Balance of Payments:
a. Current Account: records the sale and purchase of goods and services, investment
income earned abroad, and other transfers like donations and foreign aid
b. Financial Account: record the purchase and sale of financial assets like stocks
and bonds.

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#16
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Globalization and Trade and Poverty

Poverty line/threshold:
The minimum level of income deemed adequate in a particular country

Extreme Poverty:
A condition characterized by severe deprivation of basic human needs, including
food, safe drinking water, sanitation facilities, health, shelter, education,
and information.
Globalization started after world war II, where almost all of the countries start
international trade.

Mobile phones are the "single most transformative technology" when it comes to
the developing world.

Opponents of globalization calls it exploitation and oppression.

Poor poeple are the world's greatest entrepreneurs. Every day, they must innovate
in order to survive.

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#17
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Income and Wealth Inequality

Two types of economic inequality:

a. Wealth Inequality
b. Income Inequality

Wealth: Accumulated assets minus liabilities

Income: New earnings added to wealth

At first countries' incomes were all bunched together, but with the industrial
revolution the differences exploded.

The triumph of globalization and market capitalism has improved living standard
of billions while concentrating billions among the few.

Skill-Biased Technological Change:

Progressive Tax:
A tax in which the tax rate increases as the taxable amount increases.

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#18
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Marginal Analysis, Roller Coasters, Elasticity, and Van Gogh

Marginal Analysis: An analysis of how individuals, businesses, and govt. make

decision.
Additional benefit vs the additional cost.
Marginal benefit vs the marginal cost.

Law of diminishing marginal utility

Utility: Satisfaction, or happiness people get from consuming a good or service.

Utils: A unit used to quantify satisfaction; they are completely subjective.

Diamond vs water:
Total utility from water is very high, but marginal utility is very low.
Diamonds on the other hand, due to low availability, makes it high marginal util.

Substitution Effect:
As prices rise consumers will replace more expensive items with less costly
alternatives.
Elasticity of Supply/Demand:
How senstive quantity is when prices are changed.