Class notes Economics for Political Scientists (6441HEPS)

EPS CLASS 1

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Australia was once a destination for British convicts. Ship captains (circa 1787) were paid for
each felon they transported to Australia. Due to poor conditions, many would die (up to 1/3)
on the way.

How would you solve this humanitarian issue?

Start a social media campaign?

Retweet a social media campaign?

Draft a law that mandates better treatment?

Start an international organization?

Name & shame the ship captains in public?

Appeal to their humanity?

Produce a documentary exposing the horrors?

No because regulations and public appeals did not work.
What did work?
Captains were paid for each prisoner that boarded a ship. Until, one (unknown) economist
suggested that incentives should be changed. More specifically, that ship’s captains be paid
for each prisoner that made it to Australia alive.
Incentives won over sentiment!
>>Fast Forward>> 2021
You’re in a government looking to recover from a crippling pandemic. All people need to do
is get vaccinated. Yet, some have done their own “research’’ and are not convinced.
How do you get people to take the vaccine?




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, Covid `Health Pass’. Requirement Announced
Incentives matter!!!



What is the Study of Economics
Like other social sciences it centers on the study of human behavior but, with a focus on:

Economic incentives: Choosing outcomes that improve your (or a group or country)
economic welfare and how those choices are shaped by markets and other
circumstances (like policy). People make choices under scarcity through economy vs.
sentiment and benevolence.

Economic outcomes: The study of individual incentives is usually referred to as
microeconomics. The millions of incentives faced by billions of individuals and millions
of firms lead to aggregate outcomes such as:

Inequality;

Economic growth & development;

Economic crises;

Inflation & unemployment;

Trade & investment;

The study of these aggregated outcomes is generally referred to as macroeconomics in
which we find:

Business cycles and gov’t response;

International trade;

International finance;

Monetary policy


How can we explain this?
"Hockey Stick" diagram shows rapid, sustained growth in average living standards since
1700.
Like other social science, we’re not primarily interested in what is "just" or "fair". We are not
here to make moral judgements. Those questions can motivate the topics we study but they
CANNOT influence the conclusions we draw. After all, this is a social SCIENCE. Science
seeks to understand the world as it is not as we hope it to be.



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, Economics vs. Political Economy
Why do political scientists need to understand economic concepts. Politics is about “who gets
what, where, when and how”. More often than not, the “what” is an economic
variable. More often than not, outcomes we care about are shaped by both political and
economic incentives. More often than not, politics will shape economic incentives in
intended and unintended ways.



Growth & Inequality
Key concepts
Nominal GDP (or GDP growth)
Nominal GDP (or GDP growth) = Gross domestic product measured in current currency
amount. Does not account for inflation or differences in purchasing power across countries.
Simply refers to the “sticker price”. Real GDP (GDP growth) (in constant prices):

Important for measuring changes over time;

Growth adjusted for changes in inflation;

We translate current nominal prices to a consistent baseline;

Applies to any type of price measure;

Movie ticket sales;

Stock market prices;

Purchasing power parity;

Important for measuring changes across countries & time;

Growth adjusted for differences in currencies and what those currencies purchase;

Generally we translate local economic activity in to its equivalent in $US dollars of a
particular year;

Consumer Price Index (CPI).

Nominal vs. Constant (Real)
Top 5 movies based on nominal $$: Top 5 movies based on constant $$:

Star Wars: The Force Awakens (936 Gone with the Wind (1939) (1,685
million); million);


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, Avengers: Endgame (858 million); Star War (Episode IV ) (1,485 million);

Avatar (760 million); The Sound of Music (1965) (1,187
million);
Black Panther (699 million);
E.T. (1,183 million);
Avengers: Infinity War (676 million);
Titanic (1.129 million);


Economic Growth
How do we measure economic growth?

It is easier said than done…
An imperfect measure we rely on is Gross Domestic Product (GDP). We use this to compare
the size of economies across time (GDP Growth) and across countries (level of
development). Economic growth comes from increases in:

Natural resource discovery;

Physical capital or infrastructure;

Population;

Human Capital;

Technology;

Law

Learning to produce more with the same stuff.

Short term causes:

External shocks (e.g. Covid-19, trade war, Brexit…);

Government monetary or fiscal policy;

Consumer/business sentiment

GDP measures the market value of all finished goods produced within a country (usually
measured yearly).

→ Finished good = goods that will not be sold again as part of another good.

GDP measures the market value of all finished goods produced within a country (usually
measured yearly).

→ Intermediate goods = goods that will be used to make something else that will be sold;

→ Capital goods = goods that are used to produce other goods but not a part of other goods.


EPS CLASS 1 4