The advanced economist

MACROECONOMICS refers to the behaviour of the economy as a whole. The economy is disaggregated into broadly homogeneous categories and determinants of each of these aggregates are integrated to provide a model of the entire economy. It is primarily concerned with variables which follow systematic and predictable patterns of behaviour and can be analysed independently of the decision of the many agents who determine their levels.

FUNDAMETAL ECONOMETRICS TOPICS

This is an overview of some fundamental concepts:

1. **Variables**: In econometrics, we deal with variables. These can be divided into two main types: dependent variables and independent variables. Dependent variables are the ones we are trying to explain, while independent variables are the ones we believe explain or influence the dependent variable.

2. **Regression Analysis**: Regression analysis is one of the primary tools in econometrics. It helps us understand the relationship between a dependent variable and one or more independent variables. The most common type of regression is linear regression, which assumes a linear relationship between the variables.

3. **Simple Linear Regression**: In simple linear regression, we have one dependent variable and one independent variable. The relationship between the two variables is assumed to be linear, and we try to estimate the parameters of the linear equation that best fits the data.

4. **Multiple Linear Regression**: Multiple linear regression extends the concept of simple linear regression to cases where we have more than one independent variable. The relationship between the dependent variable and the independent variables is still assumed to be linear, but now we have multiple factors influencing the dependent variable.

5. **Assumptions of Regression Analysis**: There are several assumptions that need to be satisfied for regression analysis to be valid. These include linearity, independence of errors, homoscedasticity (constant variance of errors), and normality of errors.

6. **Estimation Methods**: There are various methods for estimating the parameters of a regression model, including the ordinary least squares (OLS) method, which is the most commonly used method.

7. **Hypothesis Testing**: Econometrics involves testing hypotheses about the relationships between variables.

COPIED

Classical theory
The theory of comparative advantage provides a logical clarification of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its clarification by David Ricardo the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various proposed sources of comparative advantage. Nevertheless, extremely restrictive and often unrealistic assumptions have had to be adopted in order to make the issue agreeable to theoretical analysis.
The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O) relies on the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital, referred to as factor endowments. The resulting theorem states that, on those assumptions, an country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the "Leontief Paradox" that is the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive products.

Economic Policy and Analysis
An economic policy is a course of action that is intended to influence or control the behavior of the
economy. Economic policies are typically implemented and administered by the government. Examples of
economic policies include decisions made about government spending and taxation, about the redistribution
of income from rich to poor, and about the supply of money. The effectiveness of economic policies can be
assessed in one of two ways, known as positive and normative economics.
Positive economics attempts to describe how the economy and economic policies work without resorting
to value judgments about which results are best. The distinguishing feature of positive economic hypotheses
is that they can be tested and either confirmed or rejected. For example, the hypothesis that “an increase in
the supply of money leads to an increase in prices” belongs to the realm of positive economics because it
can be tested by examining the data on the supply of money and the level of prices.
Normative economics involves the use of value judgments to assess the performance of the economy and
economic policies. Consequently, normative economic hypotheses cannot be tested. For example, the
hypothesis that “the inflation rate is too high” belongs to the realm of normative economics because it is
based on a value judgment and therefore cannot be tested, confirmed, or refuted. Not surprisingly, most of
the disagreements among economists concern normative economic hypotheses.
Goals of Economic Policy
The goals of economic policy consist of value judgments about what economic policy should strive to
achieve and therefore fall under the heading of normative economics. While there is much disagreement
about the appropriate goals of economic policy, several appear to have wide, although not universal,
acceptance.

MEANING OF ECONOMETRICS
Econometrics is the social science that applies the tools of economic theory, mathematics and statistical inference to analyze economic phenomena and to estimate causal relationships among variables i.e. how a change in one variable affects the other. Thus, econometrics combines economic theory, mathematics and statistics. This amalgamation of the three subjects is vital as illustrated below.

Definition of Econometrics (Greene, 2003)
Econometrics is the field of economics that concerns itself with the application of mathematical statistics, and tools of statistical inference to the empirical measurement of relationships postulated by economic theory.

ECONOMIC THEORY
Economic theory forms the basis for any econometric work, and should really be the starting point for econometric analysis.
However, theory itself lacks empirical content. For example, economic theory tells us that people tend to consume more in consumption expenditure, whenever their disposable income raises, i.e. the economic theory of consumption. However, as can be noted, the theory fails to give empirical content, e.g. by how much will consumption expenditure increases if income increases by one unit?
This lack in empirical content is of interest to an econometrician. Thus, econometrics helps to empirically verify economic theory.

MATHEMATICAL ECONOMICS
Mathematical economics helps us to convert the theory into an equation, which is then empirically tested by the econometrician. Thus with mathematical economics, we can say, where C is consumption expenditure and Yd is disposable income.

STATISTICS
Statistics provides the econometrician with the know-how and tools of data collection, processing, analysis and presentation of results. Thus statistics helps to test theories and explain the results.
Note: none of these three subjects independently constitutes econometrics. Actually it is their UNIFICATION that constitutes econometrics (ECONOMETRICA).

✓✓ Cost Push Inflation

Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level. This is in essence cost push inflation.

✓ In this case, the overall price level increases due to higher costs of production which reflects in terms of increased prices of goods and commodities which majorly use these inputs. This is inflation triggered from supply side i.e. because of less supply. The opposite effect of this is called demand pull inflation where higher demand triggers inflation.

Apart from rise in prices of inputs, there could be other factors leading to supply side inflation such as natural disasters or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. Generally, cost push inflation may occur in case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.

✓✓ Bailout

Bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat. It can take the form of loans, cash, bonds, or stock purchases. A bailout may or may not require reimbursement and is often accompanied by greater government oversee and regulations.

The reason for bailout is to support an industry that may be affecting millions of people internationally and could be on the verge of bankruptcy due to prolonged financial crises.

✓ Bailout policies come in various forms, the most common being direct loans or guarantees of third-party (private) loans to the rescued entity. These direct loans are often on terms favouring the entity being rescued.

The government or the financing body places strict requirements such as restructuring of organisation, no dividend payment to shareholders, change of management and in some cases a cap on salaries of executives till a stipulated time period or the repayment of dues. This may also be followed by a temporary relaxation of rules that may impact the accounts of the rescued entity.

✓ Bailouts have several advantages. First, they ensure continued survival of the entity being rescued under difficult economic circumstances. Secondly, a complete collapse of the financial system can be avoided, when industries too big to fail start to crumble.

✓ Bailouts also have their disadvantages. Anticipated bailouts encourage a moral hazard by allowing not only promoters but also other stakeholders (customers, lenders, suppliers) to take higher-than-recommended risks in financial transactions.

Balance of Payment:-

The term balance of payments or balance of payments of a country refers to the systematic record of all the International transactions for a given financial year. In other words, the balance of payments of a country is the systematic record of all transactions in goods, services and assets between the residents of a country and the residents of foreign country during a financial year.



Classification of Economic Transactions in BOP :-

Economic transactions in balance of payments are broadly categorized as given below -

a. Visible Items :

This category include all types of physical goods that are exported and imported during a financial period.

b. Invisible Items:



The invisible items refers to all types of services given and received during a financial year.

c. Unilateral Transfers:

Unilateral transfers refers to those transactions between countries which does not involves payment like government transfer which includes grants, gifts and aids.

d. Capital Transfers:

This category includes both capital receipts and capital payments like borrowings, capital repayments, sales of assets etc.

Components of BOP :-

Balance of payments accounts in general are broadly classified under the following heads -

a. Current Account

b. Capital Account

Current Account :

Current account refers to the account of BOP which is a systematic records of imports and exports of goods and services and unilateral transfers.

Capital Account:

Capital account refers to the account of BOP which is a systematic records of all transactions between the domestic country and foreign countries and which causes a change in the assets or liability of the country.

✓✓ NATURAL UNEMPLOYMENT.
>>>>>>>> By STAFF AUTHOR

Natural unemployment is often defined as the lowest rate of unemployment an economy will reach. It is “natural” because its causes are things other than the problems caused by a bad economy. For instance, one part of natural unemployment is frictional unemployment. This type of unemployment is caused by situations like new graduates just starting their search for a job, people leaving a job to move to another city, or people quitting their jobs to look for a better one.

No matter how robust the economy is, there will always be people who are unemployed while in such situations. Another part of natural unemployment is structural unemployment, which is where workers fail to find jobs and employers with available jobs fail to find workers. This problem is created by some inherent long-term change in the economy. Two of the most common economic changes creating structural unemployment are technological advances and rapid relocation of available jobs.

✓ Another factor that makes up natural unemployment is surplus unemployment. This occurs when wage controls are put in place by unions or minimum wage laws. This causes employers to cut their workforce to stay within budgetary constraints. Even when an economy is running at full strength, these types of unemployment will still occur. There is no economic or market “fix” for them. This is why most economists state that when an economy reaches the natural unemployment rate, the economy is at full employment. Most economists agree that the natural rate of unemployment is around 4%..

You can now follow Grand Economics Society on Instagram with the link below

https://instagram.com/grand_economics_society?utm_medium

✓✓ Producer Surplus

Producer surplus is defined as the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade. Producer surplus is a measure of producer welfare. It is shown graphically as the area above the supply curve and below the equilibrium price.

As the price increases, the incentive for producing more goods increases, thereby increasing the producer surplus.

A producer always tries to increase his producer surplus by trying to sell more and more at higher prices. However, it is simply not possible to increase the producer surplus indefinitely since at higher prices there might be very little or no demand for goods.

You can now follow Grand Economics Society on Instagram with the link below

https://instagram.com/grand_economics_society?utm_medium

✓✓ Price Ceiling

A price ceiling is essentially a type of price control. Price ceilings can be advantageous in allowing essentials to be affordable, at least temporarily. However, economists question how beneficial such ceilings are in the long run.

While price ceilings might seem to be an obviously good thing for consumers, they also carry long-term ramifications. Certainly, costs go down in the short run, which can stimulate demand.

However, producers need to find some way to compensate for the price (and profit) controls. They may ration supply, cut back on production or production quality, or charge extra for (formerly free) options and features. As a result, economists wonder how efficient price ceilings can be at protecting the most vulnerable consumers from high costs or even protecting them at all.

A broader and more theoretical objection to price ceilings is that they create a deadweight loss to society. This describes an economic deficiency, caused by an inefficient allocation of resources, that disturbs the equilibrium of a marketplace and contributes to making it more inefficient.

You can now follow Grand Economics Society on Instagram with the link below

https://instagram.com/grand_economics_society?utm_medium