Lesson 4: Forces at Work: Macroeconomics

  1. Review of readings.
  2. Fallacy of composition.
  3. Discussion of the "real economy":
    1. Production/income made up of aggregates: Consumption, Government spending, Investment, and Net Exports.
    2. Economy embedded in a society and the natural world.
    3. It's a dynamic system. Stocks vs. Flows.
    4. What happens when aggregates go out of balance? E.g., too much C, too much I, NX too negative for too long, G too much bigger than T, too much population, or uncounted capital losing capacity?
    5. What happens when prices change? E.g., inflation, hyperinflation, deflation, fluctuation in terms of trade (importance of diversity), exchange rates, devaluation.
    6. Role of expectations, confidence, self-fulfilling prophecies.
  4. Wrap-up and quick evaluation.
Take-home point: in a closed system (such as the world economy, our planet), things have to balance out. Imbalances cannot go on forever without crisis and resolution.