48

Trade creates value. Previously, Kate preferred spending \$50 on food at Alice's restaurant (rather than cook her own food). And Alice preferred spending \$50 getting her hair cut at Kate's (rather than cut her own hair). That Kate must now cook her own food and Alice cut her own hair means that value has fallen (where value is broadly defined as the degree ...


38

Very obscure historical example: From 1287 to 1295, the Danish nobleman Stig Andersen Hvide was leading a band of outlaws from the island of Hjelm supported by the king of Norway against the king of Denmark. Stig managed to kidnap expert coin makers and bring them to Hjelm, where they produced counterfeit Danish coins. This allowed Stig and his supporters to ...


29

https://en.wikipedia.org/wiki/Operation_Bernhard (an exercise by Nazi Germany to forge British bank notes. The initial plan was to drop the notes over Britain to bring about a collapse of the British economy during the Second World War. )


18

Both Alice and Kate have bills to pay, regardless of whether they are earning money or not. Restaurants and salons have to pay rent and maintenance on their properties whether they are in business or not. They both need to feed themselves and possibly their families whether they earn income or not. They need electricity and water and other utilities in ...


13

Trade is good because it creates efficiency. Alice has invested in her kitchen and knows the supply chain of ingredients, and due to the efficiency of her business, she can sell a meal for $50. If Kate wants to cook the same meal, she'll have to buy all the necessary equipment and ingredients, and spend time learning cooking techniques, and by the end, she'...


12

David Petruccelli writes in "Banknotes from the Underground: Counterfeiting and the International Order in Interwar Europe" In December 1925, a group of Hungarian nationalists were caught trying to put into circulation a large quantity of counterfeit francs in a bid to weaken the French economy and fund irredentist action in Central Europe. Edit: ...


7

Most people aren't Alice and Kate. GDP is a measure of the total goods and services produced within an economy. The point is measuring total production, not measuring how much money is changing hands. There are a couple of things going on here: In the example you mention of Alice and Kate, there is presumably some reason why they were paying each other ...


7

Let's consider another example. I'm an automotive manufacturing service engineer; I build and repair machines that are used to build and repair cars. I use the money I earn to buy a variety of things, including, say, gasoline. Of course, if all of the automotive manufacturing service engineers stop working, that's no big deal. People can just build their ...


7

As you pointed out the diagram is used to illustrate that Production (or more appropriately output) = Income. In this case it equates it to consumption but that is not generally true of all circular flow diagrams. However, besides that it has many other uses as well as it is an easy way of provide a bird’s eye view of all important flows in the economy. ...


7

One interpretation: Think about the equation above in GDP accounting terms. We know that in an economy, Total Savings ($S(t)$) = Total Investment ($I(t)$) (standard GDP accounting exercise). How is this relevant here? The right hand side is the Total savings in the economy: $\underbrace{s}_{\text{savings rate}}\times\underbrace{Y(t)}_{\text{total output}}$....


6

The simple answer to why the Cobb-Douglas functional form is used is because it is at least a log-linear approximation to some higher-order production function. That is, suppose you take a functional form that looks like this: $\log Y_t = f(A, K, L)$. Then a linear approximation would look like the Cobb-Douglas production function. (For a small $1\%$ ...


6

I used to think that microeconomics was relatively more scientific than macroeconomics. Early macroeconomics, in particular, suffered from a choosing models of agent behavior that made modeling easier but bore little relationship (or at least a highly disputed relationship) with reasonable behavior of individual agents. This led to the microfoundations ...


6

I really think a great place to start in general is Olivier Blanchard's "Macroeconomics". However, this is an economics undergraduate text and may not be optimal for a mathematician, especially given the structure you expect. More to your taste may be the following standard texts: "Introduction to modern economic growth" by Daron Acemoglu. "Recursive ...


5

The Wikipedia statement should come with a citation or proof, as it is not entirely accurate: Cobb-Douglas functions with increasing returns to scale do not necessarily satisfy the Inada conditions, e.g., $f(x_1,x_2) = x_1^2x_2^2$ does not. There are many non Cobb-Douglas functions that satisfy the Inada conditions, albeit they may not have nice compact ...


5

The Treasury continuously issues new debt, and retires matured issues. (This is called “rolling over debt.”) The Treasury has no right to pay debt off early (“refinance”). The closest thing that can be done is to repurchase debt. The Federal Reserve - whose common equity is owned by the Treasury - is repurchasing debt during “quantitative easing” operations.


5

I don’t think crisis itself has set definition as opposed to recession, unless you attach some clarifier to it as the examples you mention. Generally the word is even in academic work thrown around quite loosely. For example in Romer advanced macroeconomics in the subject index for word crisis you will find: crisis; see debt crisis; economic crisis of ...


5

In theoretical modeling the consistency is applied in the same way as in philosophy/logic. Internal consistency simply means that the argument is consistent with itself and has no contradiction within itself (as opposed to external consistency where its not enough for argument to be valid on its own but it should also not contradict other facts). A simple ...


5

You seem to be having some misconception how these transfers work Printing money and giving to the poor causes inflation. Increases demand and hikes prices. This is basically certain. This is not generally how government transfers are done. In fact it is very rare to see in practice transfers that are payed by directly printing money. However, if it ...


5

My field of interest is the government bond markets. Based on a couple of decades of experience, I would argue that it is safe to say that people do not intuitively grasp the circular flow of income in the economy. Instead, they ask where the money to buy government bonds will come from? This understanding could be picked up by looking at systems of ...


5

This is done in order to make the solution more general. If you use specific utility function you prove your result only for that specific utility function and not for other ones. You can still derive Euler equation. For example in a simple 2-period consumption model where agents maximize their expected utility $$E[u]=E[\sum_{t=1}^T u(C)_t]$$ where $t=1,2$. ...


5

Rent-seeking Has no single agreed-upon definition (see the many definitions below). Is a fancy synonym for "bad for society" (see especially Tullock, 1989 below). Sometimes (but not always) refers specifically to lobbying (your example seems to be following this usage). (In light of the above, my opinion/recommendation is that everyone should ...


4

Opportunity cost is simply the value not obtained of the highest value alternative. It can be positive or negative; meaning it doesn't really make sense to define the opposite as opportunity profit. There is only two ways to go about it rationally, either you are profiting from doing something, or you are not profiting by not doing something, which is ...


4

As you point out, central banks have "printed" a considerable amount of money since the 2008 crisis. The following chart of the US monetary base is one of clearest examples of this phenomenon. The metric you seem to be pointing out through your question is known as the money multiplier: the ratio of broad money (e.g., M1, M2, or MZM) to the monetary base. ...


4

Why have M3 not followed the same quantitive expansion as M1? Because commercial banks have used injected liquidities to "consolidate" their balance sheet instead of credit-stimulating demands. What I mean by "consolidate" is that the subprime crisis and its consequences have contaminated the Euro-zone's commercial banks through securitization, ...


4

That statement is not generally true. It is true of rivalrous goods (e.g. when I take a slice of a pizza, there's that much less left of the pizza for you). It is false of non-rivalrous goods (e.g. when I step into the sunshine, there is usually* no less of the sunshine for you). *Unless of course I somehow also block the sunshine for you.


4

This is very fundamental and I'd recommend that if you're still not crystal clear about this you should talk to your TA or course instructor, since you'll have a hard time going through the course without fully grasping this. The demand graph represents the relationship between price and quantity, holding everything else constant. So it's saying that as ...


4

There is no distinction between money in microeconomics or macroeconomics. In both fields money is medium of exchange, unit of account and store of value. The misconception you have probably arises from the role money plays in microeconomics and macroeconomics. In microeconomics money is almost always neutral - that is it has no impact on the real ...


4

If they invest in productivity-enhancing stuff, GDP could grow at a faster pace than the [increase in] debt. Then the debt to GDP would decrease.


4

As others pointed your statement about upturns and downturns is not right. An empirical evidence clearly shows that there are short sharp recession followed by long periods of moderate expansion (see Romers Advanced Macroeconomics handbook) and also see the picture below. It is the Fred series for US growth where you can see recessions (downturns) ...


4

Have you read: Barro and Sala-i-Martin (2004, 2e), Introduction Acemoğlu (2009), Introduction Paul Romer (2016), "The Deep Structure of Economic Growth" Robert Lucas (1988), "On the mechanics of economic development", Introduction: I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action ...


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