Macroeconomic Policy in the Global Economy Issue Paper

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ITRN 503: Investment and Macroeconomics Auerswald

Professor Philip Auerswald

Session No. 1: Introduction to the Course

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 2

Today’s Class

• Course Organization and Mechanics • Math Review

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Lecture #1 3

Grading • Issue Paper: 30% • Midterm Exam: 15% • Final exam: 25% • In-class participation, including three one-paragraph response

papers: 20%

Course organization and mechanics

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 4

Course organization and mechanics

Evaluation of Issue Paper • Framing of the research question—Did you clearly define the

essential policy issue? • Quality of research— Did you make use of, and properly cite, the

relevant literature and data sources? • Logic of argumentation and clarity of expression—Does your memo

make sense? • Quality of analytic work and modeling—Did you use your data

carefully and effectively? • Overall creativity and thoughtfulness—Does your memo contribute

new insights?

The issue paper will count for 25% of your grade.

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Lecture #1 5

Course organization and mechanics

Final Exam • Final exam accounts for 25% of your grade. The exam will cover all material

covered in class, and all readings listed on the syllabus. It will be comprised of – 5-10 true/false questions; – 3 longer problems to solve; and – 1 essay

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Lecture #1 6

Data interpretation • ALWAYS, ALWAYS ask:

– Where do the data come from? – Who produced the figures? – To what period do the figures relate? – Are the data seasonally adjusted? – Will the data be revised? – Are indicators adjusted for inflation? – What do the categories of data stand for? (E.g. what kind of production

is included in manufacturing sector? – Varies along countries)

Course organization and mechanics

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 7

A Framework for Analysis • Establish the context • Lay out the alternatives • Predict the consequences • Value the outcomes • Make a choice

Course organization and mechanics

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 8

Philip E. Auerswald office: Arlington Founders Hall 632 Email (preferred mode of contact): [email protected] Tel (cell): 202-378-6438 office hours: Thursday 3:30-4:30PM

Arlington campus Founders’ Hall 664

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 9

Math Review

• Area • Slope • Exponents • BREAK • Derivatives • Overview of calculus: A worked example • Optimization

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Lecture #1 10

Organization of material

Every concept • Why? • Mechanics • Example • Drill

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Lecture #1 11

• Calculating profits • Effects of government policy like taxes, subsidies, price controls,

trade protection, etc. – Consumer and producer surplus. – Tax revenue / Costs of subsidy.

Why area as prep for ITRN 503?

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 12

Mechanics of area

AREA = BASE � HEIGHT = 2 in � 2 in = 4 in � in = 4 in2

HEIGHT = 2 in

BASE = 2 in

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Lecture #1 13

Mechanics of area

AREA = (1/2) � (BASE � HEIGHT) = (1/2) � ( 2 in � 2 in ) = (1/2) � ( 4 in � in ) = (1/2) � ( 4 in2) = 2 in2

HEIGHT = 2 in

BASE = 2 in

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Lecture #1 14

Area drill

Given that:

AB = 6 m

BC = AE = 8 m

CD = 6 m

ABCE is a rectangle.

ECD is a right angle triangle, right angle at C.

Calculate the area of ABDE.

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 15

Area drill: answers

triangle

(1/2)* (b*h) = (1/2) * (6 *6)

=1/2 (36)

= 18

rectangle

(b*h) = 8 * 6

=48

TOTAL = 48 + 18

= 66 m2

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 16

Area drill

Given that:

AB= 6 m

BC= 8 m

CD= 6 m

ABCE is a trapeziod.

Formula: ½(AE + BD)*AB

½(8 + 14)*6 = 66m2

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Lecture #1 17

• The concept if slope is at the heart of “marginal analysis”. • Slope is also closely related to the concept of elasticity. • Both are core component of microeconomics.

Why slope as prep for ITRN 503?

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 18

Mechanics of calculating slope

• The slope of a function y = f (x)

is a ratio

ΔΔ y

Δ x

=Rise

Run

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Lecture #1 19

Mechanics of calculating slope

y = 4x + 5 What does this function look like?

x y 0 5 1 9 3 17

(0,5 )

(1,9)

(3,17 )

In general, if the function is given by

y = mx + b

Then “m” is the slope and “b” is the y-intercept

Equation of a line

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Lecture #1 20

Slope drill

What is the slope of the function

100 x + 50 y = 400 ?

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Lecture #1 21

Why exponents as prep for ITRN 503?

• Rates of growth (e.g. compound interest) • Returns to scale • Taking derivatives

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Lecture #1 22

Why exponents as prep for PUBP720?

labor

# of cars assembled (Q)

Linear: y = mx + b

a <1 (ex. 0.5)

Exponent: y = mxa + b

# of cars assembled (Q)

labor

Diminishing MPL (e.g., congestion)

Increasing MPL (e.g., division of labor)

a >1

a = 1

EXCEL demoSo basically exponent is a math tool to capture nonlinear relationship.

MPL = 2

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Lecture #1 23

Mechanics of Exponents

numberx = number • number • number … (x times)

numberx • numbery = number(x+ y)

numberx / numbery = number(x - y)

number0 = 1

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Lecture #1 24

Mechnanics of Exponents

23 = 2 • 2 • 2

32 • 34 = 3(2+ 4)= 36

34 / 32 = 3(4-2)=32

(34 )2 =34*2=38

30 =100 =2450 = 1

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 25

1. 24 ·22 = 2?

2. 73 ·33

74 ·32 =?

3. ³ 54 ´2 = 5?

Exponents drill

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Lecture #1 26

Exponents drill: answers

1.

24 ·22 = (2 ·2 ·2 ·2) · (2 ·2) = 24+2

= 26

2.

73 ·33

74 ·32 =

73

74 · 33

32

= ³ 73¡4

´ · ³ 73¡2

´

= 7¡1 ·31

= 3

7

3. ³ 54 ´2 = 54 ·54 = 54+4 = 58

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Lecture #1 27

A derivative is just a slope

Di®erent ways to express the formula for the slope of a line:

rise

run = change in y

change in x = ¢y

¢x ¼ dy

dx

In other words, a derivative is just a slope, where both dy and dx are restricted to being

infinitesimally small.

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 28

Why derivatives as prep for PUBP720?

• Economic decision-making is about comparing the value of the next unit of something with its cost:

benefit of another song dowloaded from Itunes > $0.99 ? If so, then buy it.

If not, don’t.

• A decision that compares the costs and benefits of a small increase in the level of an activity is called a decision “at the margin.”

• MARGINAL ANLAYSIS—the study of decision-making at the margin— is fundamental to microeconomics.

• From a mathematical standpoint, slope is the concept that expresses the notion of a cost or benefit “at the margin.”

An ornithological motivation… 28

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ITRN 503: Investment and Macroeconomics Auerswald

Lecture #1 29

Optimization with a single variable: Bagel shop

derivative = slope = 0

P ro

fit (π

)

# wage hours / day

π = f(q)= 1000 q — 5 q2

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