In response to Pat Gunning:
"Forced" to do the derivations verbally because teachers will not accept
elementary algebra as a mainline technique in first year courses
Illustration: my UK text book An Introduction to Positive Economics was the
leading text book in the UK from the mid 1960s to the early 1980s. Then I
decided to develop the key macro relations in three ways: verbally,
geometrically and finally algebraically. I immediately suffered a massive
loss of adoptions. The market had spoken: it did not want algebra, even when
it came after both an intuitive verbal and a geometric derivation. I had to
decide between sticking with this treatment or being used. So I went back
to verbal and geometric derivations only (There is no point in writing a
text book that no one will use.)
"Forced" to derive AD before money is introduced was too strong a word to
use here. Again in my 1980s treatment I derived the AD curve after I had
introduced money and so could do it in the standard way. But instructors
overwhelming wanted to introduce AD before the Demand for and Supply of
money were introduced . To do this, one has to allow the Aggregate
Expenditure function to be shifted through a wealth (outside not inside
wealth) effect, but not an interest rate effect, as the price level is
varied. There is nothing misleading or incorrect in this. It is just that
empirically the (outside) wealth effect is much less powerful than the
interest rate effect. The latter is then introduced after dealing with money
Demand and Supply. This is what most text books do, and then point out after
this has been done that the interest rate effect is more important
empirically than the wealth effect Ideally I would not introduce the AD and
AS curves until after both the expenditure and monetary equilibrium
conditions had been introduced, but this is not what instructors want. It is
NOT a matter of right or wrong but a matter of pedagogy as long as one ends
up with the verbal and geometric expression of the equations of the final
model. As already mentioned, these issues are covered in much more detail in
my essay on AD and AS in Blaug and Lloyd's new book Famous Diagrams and
Figures in Economics
.
Richard G. Lipsey
Phone: 778-279-1002
URL: http://www.sfu.ca/~rlipsey
WINNER OF THE 2006 SCHUMPETER PRIZE:
ECONOMIC TRANSFORMATIONS:
General Purpose Technologies and Long Term Economic Growth
Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar
Available now through all good bookshops, or direct from Oxford University
Press at:
URL: http://www.oup.co.uk/isbn/0-19-929089-X
----- Original Message -----
From: "Pat Gunning" <[log in to unmask]>
To: <[log in to unmask]>
Sent: Monday, February 14, 2011 8:48 AM
Subject: Re: [SHOE] Wrt. aggregate supply and demand
> Richard says that "first year textbooks are 'forced'" to derive an AD
> curve in a way that does not correspond to how the curve is actually (or
> "properly" or "logically") derived. He says that this is done for
> "pedagogical convenience." Can we really take this seriously? Surely, the
> purpose of deriving the AD curve in this way is misleading. The student
> who goes on to study macroeconomics must "un-learn" this way. And the
> student who does not go on is deceived into believing that she has learned
> something that she has not learned at all.
>
> On 2/9/2011 4:39 PM, Richard Lipsey wrote:
>> Robin Neil asks about the axes of the AD curve. The micro demand curve
>> can be seen as a behavioral relation in which dependent and independent
>> variables may be a valid distinction (although, as the long
>> correspondence on this matter shows, it is a matter or how one
>> interprets this type of curve). In contrast, the macro AD curve is a
>> locus of equilibrium values for the price level (P) and real GDP (Y). It
>> shows all the combinations of these two variables for which aggregate
>> demand would be just enough to purchase that amount of real output IF it
>> were produced. One can just as well say that, given Y, there is only one
>> P the will do this job or, given P, there is only one Y that we do this
>> job. So the distinction between independent and depended variables does
>> not apply here.
>> First year text books (including mine for Candida and the UK) are forced
>> to derive an AD curve verbally and before money is introduced. This is
>> best done by changing P exogenously and determining the equilibrium level
>> of Y for each chosen P. But this is only for pedagogical convenience. If
>> one is deriving the curve algebraically, one lays out the equations of a
>> simple Keynesian model (1) desired aggregate expenditure (2) money demand
>> (3) money supply and two equilibrium conditions (4 ) desired expenditure
>> to equal total output and (5) the demand for money to equal its supply,
>> and then substitutes these to obtain one AD curve equation relating P and
>> Y without ever identifying P or Y as dependent or independent variables.
>> This and related matters are discussed in much more detail in my essay
>> on AD-AS in the new book by Mark Blaug and Peter Lloyd, "Famous Figures
>> and Diagrams in Economics"
>> .
>> Richard G. Lipsey
>> ----- Original Message -----
>>
>> *From:* Robin Neill <mailto:[log in to unmask]>
>> *To:* [log in to unmask] <mailto:[log in to unmask]>
>> *Sent:* Friday, February 04, 2011 6:05 AM
>> *Subject:* Re: [SHOE] Wrt. aggregate supply and demand
>>
>> Serendipitously, this morning one of my students
>> ask why the general level of prices was on the
>> vertical axis and Real GDP on the horizontal axis.
>>
>> My text's explanation for the negative slope of the
>> aggregate demand curve sets Real GDP as the
>> dependent variable. Should it not then be on the
>> vertical axis? Is not the same true of the
>> short run aggregate supply curve?
>>
>> Anyone have an answer?
>>
>> I do not think that the analysis suffers from
>> conventionally putting the general level of
>> prices on the vertical axis.
>>
>>
>> Robin Neill
>>
>
> --
> Pat Gunning
> Professor of Economics
> Melbourne, Florida
> http://www.nomadpress.com/gunning/welcome.htm
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