Learn From the Shipwreck!

We will understand how the economy works, through a story of a shipwreck on an island. Although we want to understand aggregates (or the total impact on an economy), we will always start by looking at individuals, in order to understand how these individuals, or agents, make decisions. This allows us to derive implications for the economy as a whole. To be able to understand what happens, we need to make significant assumptions that simplify the situation to better understand basic economic concepts. As you will see, a lot can be learned by using models and stories that have unrealistic or extreme assumptions.

We will start by taking a look at the simplest possible scenario: a person, on an island, who only has the resources to make goods by himself. This situation will allow us to introduce some relatively simple concepts that will then be used in most of the subsequent analyses.

Once this island economy is established, we will allow our "poor lost friend" to be joined by more people, and progressively the features of the island will change making it resemble (though not too closely) a real economy: money, bonds, a labor market, capital equipment, a government…and another island ("the rest of the world").

At all stages, we will compare the conclusions that we get from working with our simple island world to data we have on the U.S. and other world economies.