Book Title: Macroeconomics: The Big Picture

Book Description

This is a one semester, creative commons licensed (CC-BY-NC) macroeconomics textbook designed for community college students. These students may be studying for a degree part-time while working a job and raising a family. They may be fresh out of high school, or older students returning to school after decades in the workplace. They may be English language learners. They may know about some of the curriculum, like discriminatory housing or labor markets, from firsthand experience. For all of them, the mission of this book is to teach them to use economic analysis, particularly to address their own lived experiences.

After teaching at an urban community college for a dozen years, I was frustrated by the list price and the culturally narrow worldview of our mainstream economics textbooks.  I wanted a free e-book for my students that was open source.  I didn’t want it to be encyclopedic, because volume (even if it’s recommended, not required reading) turns away a lot of students. I wanted it to develop curriculum in a sequence that matched the mainstream, giving students a foundation for taking further courses. I didn’t want it to have an explicitly anti-capitalist accent. As I have found teaching at BMCC, students come from a variety of political backgrounds. Sometimes the students who are struggling the most financially, are the most pro-capitalist ideologically. Sometimes left-leaning students don’t read a leftist textbook as critically as they should. They’re not pushed to refine their arguments. For me, a good textbook raises the questions and leaves the debates for the classroom.

People often ask about the ‘learning outcomes’ this book anticipates.  If students who are taking macro ‘because it’s required,’ could realize that economics actually relates to their lives, that would be a positive outcome.  If students could begin to understand some things they had only wondered about–like why the government doesn’t just print more money, or how there can be a national debt when common people can’t keep owing money forever– that’s a great outcome. If students feel motivated to read a newspaper every day, especially the business news—that would also be great.

Some students are studying macro as part of their economics major. This text offers them the basics of macroeconomic theory–how we define the concepts we work with, how to build and use the aggregate model–so they can take higher level courses in economics or business with a good grasp of the fundamentals.

Others are not formal students but don’t mind learning about the economy we live in. Welcome aboard, all of you!

Now, a brief summary of the contents of  Macroeconomics:  The Big Picture

PART ONE: THE BASIC TOOLBOX

We start by laying out the basic tools used in macro and microeconomics, especially our use of models. We will then use some of these tools to examine some major roles of the government in the economy: running the criminal justice system, setting price ceilings and price floors, and addressing inequality through the creation of a tax system.

1. Welcome to economics

Economics, like other disciplines, has a central organizing concept: scarcity.  That seems reasonable…until we explore it a bit more, and then we wonder: are the important things in life really scarce? What are some of the basic principles that economics is based on? What about the premise of rational decision-making by ‘economic man,’ making decisions balancing the costs and benefits of every choice.  Is that how we actually decide things?  Is it good enough to pretend we act as if that is true?

2. Economics is a social science, so we use models to analyze situations

We develop the circular flow model and the production possibilities model.

3. The Demand and Supply Model

The most famous economic model is the ‘demand and supply model.’  We define what markets are, what perfect competition is, and what it means to be a ‘price taker.’ We develop the most basic version of the demand and supply in ‘perfect competition’ model and we explore what makes curves shift. We take time to explore ‘equilibrium.’

4.  Elasticity & Welfare Analysis

Now that we have our demand and supply model with its equilibrium, we look more closely at the shape of the curves (elasticity) to see what insights their steepness or flatness offer. We then use ‘welfare analysis’ to understand some hidden benefits (consumer surplus, producer surplus) of that equilibrium price.

5.  Government Roles in the Economy:  Price Ceilings and Price Floors

This is our first of three sessions on proper roles of the government in the economy. Here, we examine what happens when the government puts a maximum on a price (a ceiling) or sets a minimum price (a floor) on some goods or services, when those controls are effective (binding) and what happens in these markets.

6.  Government Roles in the Economy:  Market Failures (Public Goods and Externalities) and the Criminal Justice system

We continue looking at appropriate roles for the government in the economy. Understanding that private enterprise can impose costs on society from its activities (externalities) we look at situations (think, pollution!) where the government steps in to correct the market. Since the government usually structures and finances the criminal justice system, we examine some current economic issues that arise: so-called ‘restitution centers’ and LFOs, police liability insurance, and the ending of cash bail. Privatization of various forms of detention is discussed.

7.  Government Roles in the Economy: Taxation and Addressing Income Inequality

Finally, governments levy taxes to finance the services they provide (education, infrastructure, etc.). Governments also redistribute tax revenues to address inequality. How effective is this?

PART TWO: THE BUILDING BLOCKS OF THE MACRO MODEL

8.  Defining GNP

The most basic concept of macro may be GNP (or GDP) which is defined as the “market value of ‘all’ final goods and services produced within an economy in a given period of time.”  We examine each part of that definition to understand its importance.

9.  Interpreting GNP

Now that we understand how GNP is defined, we can explore its usefulness as a concept.  We’d like to be able to measure how well an economy was performing over time, or how its performance compares to other economies.  Is this what GNP actually does?

10. Measuring the Price Level

We have a problem. If our GNP is 10% bigger this year than last year, does that mean we have 10% more stuff to play with?  Or does it just mean the price of everything went up by 10%?

11. Unemployment:  How It Is Defined and Modeled

The person on the street thinks you are unemployed if you don’t have a job. But that’s not how economists define unemployment.  So now we look closely at who is included and excluded from the definitions. We explore the unemployment rates of different groups in the economy. We ask, why is there unemployment—is this a market failure?  Or?

12. Unemployment and the Future of Work

Does Automation/AI mean we face a jobless future? If so, what will we live on? Could Universal Basic Income play a role in all our lives?

13. Production and Growth

Remember the production possibilities frontier from the opening chapters?  We saw that pushing the frontier outward was a way of showing economic growth. Now we look at growth and what determines it.  We start with the production function, which is like a ‘recipe’ for the output of the economy.  Then we examine what happens to output when we increase the various inputs.  In particular, we are interested in what stimulates technological change, or inventions, or creativity.  Do patents and copyrights play a role? What about open source?

PART THREE:  MONEY ENTERS THE PICTURE

14. Tools of Finance: Stocks, Bonds, Mutual Funds, Insurance

If investment in human and physical capital is a route to growth, we need to see how funds are channeled into such capital formation. How does cash get from your wallet to a business that wants to expand?  Financial intermediaries!

15. The Market for Loanable Funds/Alternatives

How does investment happen?  We start with the model economists use: the market for loanable funds, which shows the supply of these funds (your personal savings and government budget savings) and the demand for such funds (from businesses wanting to expand, to invest in capital formation). This model determines an equilibrium real interest rate and a quantity of loanable funds.

We also consider economies where there is no interest rate because interest is NOT charged, the world of Islamic, or sharia-compliant, finance. How does that work?

We also consider informal systems people use for raising funds for investment without interest charges (savings clubs like ‘susu’, for example) and new ways of financing student loans.

16. Money: What It Is, How It Works

Finally, it is time to talk about money—what it is… and isn’t. We consider the different types of money, liquidity, and how fractional reserve banking works.

17. The Federal Reserve

The “Fed” was established early in the 20th century as America’s central bank. It regulates and stabilizes the banking system and formulates monetary policy.

18. Monetary Policy, and Inflation

We explore the policy tools the Fed uses, both pre- and post-2020.  What are the problems created by inflation or deflation?

19. The Future of Money

Now that we understand the role of money a bit more, we need to think about how money is changing.  Globally, a lot of people have no access to banks (the “unbanked”) so new types of money (m-pesa, for example) have been invented.  People who wanted more anonymity and less government regulation with their transactions have invented various cryptocurrencies, like Bitcoin, to serve their needs. How do these work (and not work)?

PART FOUR:  THE AGGREGATE MODEL AND THE WORLD ECONOMY

20. Building the Aggregate Model of the Economy: aggregate demand, short run aggregate supply and long run aggregate supply

Now that we have examined some key concepts (GNP, CPI, full employment, growth, the money supply) we can put our aggregate model together.  The aggregate model, with the price level on the vertical axis, and real output on the horizontal axis, is saying that nominal variables CAN affect real variables, and this is a very neo-classical view.

Notice that in our aggregate model, we are relating changes in the prices of ALL goods and services to the quantities of ALL things being produced.  Unlike the simple S & D model at the beginning of our course, there’s no way to ‘substitute-away’ from a good that has become more expensive. Everything moves in the same direction. We also introduce a time dimension now—a short run and a long run on the supply side.

21. The Aggregate Model: Equilibrium

Now that we have our aggregate curves, we need to understand the equilibrium positions we have reached. We need to interpret what we’ve just built. We consider the role of automatic stabilizers when we are in a recessionary or an over-heated economny.

22. The Aggregate Model: Discretionary Policy (Monetary and Fiscal Policy)

We look at the role of the Federal Reserve’s monetary policy, or the legislative branch’s fiscal policy in moving us to a  full employment equilibrium.

23. International Trade: In theory, great. In reality, there are problems…

Why are economists in favor of free trade (as few barriers to trade as possible)?  To understand this position, we look at the theory of (absolute) and comparative advantage, which says that when countries specialize in what they do best and trade with each other, world output increases.  First we explore the theory, and then examine real-world outcomes.

24. Globalization, a good thing?

In the modern world, companies are multinational and supply chains are sourced all over the world, with different elements produced and processed in different countries.  This is a different reality than the simple comparative advantage model, of one country trading beef for cars. Also, what is the relationship of globalization to climate change and global warming?

25. Development Economics

The field of development economics brings together insights from studying economic growth, the role of government in an economy, trade issues, and more.  A basic concern for global social justice brings many economists to the development field, yielding a variety of different approaches.

APPENDICES