Thinking Like an Economist

Warm-up: one cup of coffee

Did you get your coffee this morning? Yes or not yet, that cup is the whole course in miniature. Who made your coffee this morning? The answer takes in four continents, five currencies and a dozen kinds of work.

A global supply chain in one cup

Your coffee passes through six stages:

• Farm - Brazil, Vietnam, Ethiopia
• Shipping - ports, ships, insurance
• Import - customs, dollars, trade finance
• Roaster - machines, energy, labour
• Café - rent, barista, milk, cup
• You - the final consumer

Türkiye grows almost no coffee, so the beans, the machines and much of the packaging are imported and paid in dollars, while the work done at home is paid in lira. Nobody coordinated these people. How does an unplanned chain like this hold together?

The inputs behind the cup, as the lecture classifies them:

What is inside the price of a cup?

The slide breaks the price into four boxes that add up to what you pay:

• World bean price - in dollars, set in New York and London
• Exchange rate - lira per dollar
• Domestic costs - wages, rent, energy, milk, the cup
• Tax and margin - VAT and the café’s profit
• = Your cup, in lira

Two engines, two speeds. The imported part moves with the world coffee market and the lira. The domestic part moves with wages, rents and energy: with Turkish inflation. Each box has its own inflation story.

The coffee belt: where the beans grow

Coffee grows only in a narrow band around the equator, between the Tropics of Cancer and Capricorn. Brazil, Colombia, Ethiopia, Vietnam and Indonesia all sit inside it. The comfort zone for arabica is 18-21 degrees Celsius; heat, drought and frost all cut yields. When the climate in the belt changes, the world’s supply changes with it.

Three numbers from the slides:

• 50% of world coffee comes from just two countries: Brazil and Vietnam.
• -20%: Vietnam’s 2023/24 harvest, after a prolonged drought.
• -50%: projected loss of land suitable for coffee by 2050.

Sources on the slide: FAO (2025); Bunn et al. (2015), Climatic Change 129; map: Natural Earth.

When the weather turns, the price jumps

World arabica prices, in dollars per kg, and the events behind the spikes. Source: IMF primary commodity prices (other mild arabica, green beans, monthly) via FRED, converted to dollars per kg; weather events from FAO and market reports.

1. 2002 - oversupply. New plantations flood the market; the price falls to 1.2 dollars per kg.
2. 2014 - drought in Brazil. The price jumps from 2.9 to 5.0 dollars per kg.
3. 2021 - frost and drought in Brazil. From 3.5 to 5.9 dollars per kg.
4. 2023-24 - droughts in Vietnam and Brazil. From 4.5 to 7.6 dollars per kg.
5. 2025 - record. About 9.0 dollars per kg, the highest since at least 1992.

From the bean to the lira, 2020-2026

The same beans, two currencies. Quarterly averages, January 2020 = 100, log scale. Sources: IMF (other mild arabica) and OECD lira per dollar via FRED; TÜİK CPI.

• Late 2021: one dollar went from 8.5 to 13.6 lira in three months.
• Mid-2023: from 19.8 to 26.9 lira.
• By 2025: the world arabica price in dollars was about 2.5 times its January 2020 level; the price of a dollar in lira about 8 times; the same beans in lira about 20 times.
• About 70% of the bean’s rise in lira came from the exchange rate.
• Turkish consumer prices rose roughly 9.5 times over the same period.

Why it keeps rising: four engines

1. Abroad - a world supply shock. Droughts in Brazil and Vietnam; arabica hit a record in 2025.
2. At the border - the exchange rate. Beans, machines and packaging are priced in dollars.
3. At home - domestic costs. Wages, rent and energy follow Turkish inflation.
4. In our heads - expectations. Expect 30% inflation, and prices rise in advance.

Puzzle from the slide: world coffee prices fell in early 2026. Did your cup get cheaper? If not, why not? The price you pay is a sum of boxes: the world bean box fell, but wages, rents, energy and expectations did not fall with it.

Why is the cafeteria closed?

The lecturer’s market was the faculty cafeteria: costs up, customers down.

1. Costs rose. Beans in lira, rent, wages, energy: every input got dearer.
2. Students bought less. Allowances lagged inflation; higher prices sent students to the thermos.
3. Profit went negative. Profit = price times quantity minus costs, and revenue no longer covered costs. The operator went bankrupt.

A natural question: why not raise prices even more? Higher prices mean fewer cups sold, and students can bring a thermos; the lost customers can outweigh the higher margin.

Two shocks, one small market:

• Supply shock: higher input costs push supply up, from S₀ to S₁.
• Demand shock: lower purchasing power pulls demand down, from D₀ to D₁.
• The result: quantity falls for sure. The price effect depends on which shock is larger. Below break-even, the firm exits.

Multiply this by thousands of small firms: that is how inflation reaches output and jobs.

Eight questions for today

1. What is an economy?
2. How does the economy work?
3. What is economics?
4. What do economists do?
5. What skills does it take?
6. What makes a real economist?
7. Does the world need economists?
8. What will the world demand?

Three words, three definitions

• Economy - an organization created by humanity: the way we organise production, consumption and distribution.
• Economics - examines that organization, tries to understand it, and suggests how to improve it.
• Economist - the person who does economics properly.

If the economy is an organization we build, we can also rebuild it. That is why economics matters.

Question 1: What is an economy?

The lecture gives three views of the same thing.

• A number. GDP: the market value of all final goods and services produced in a period.
• A network. Millions of exchanges linking households, firms, banks, the state and the rest of the world.
• A system. How a society organises the production of what it needs to live, paid or unpaid.

All three views rest on scarcity. Resources - time, labour, land, capital - are limited, while wants are not. Scarcity forces choices, and every choice has an opportunity cost: the value of the best alternative you give up. A standard textbook definition says economics is the study of how society manages its scarce resources; the lecture’s own definition, above, is that economics examines the economy and suggests how to improve it.

Question 2: How does the economy work?

The economy is a circuit, open to the world.

In the circuit:

• Households earn wages, rents and profits ($Y$) from firms and spend ($C$) on what firms produce.
• The government takes taxes ($T$) and spends ($G$).
• Financial system: households save ($S$), which funds firms’ investment ($I$).
• Rest of the world: foreigners buy our goods (exports, $X$) and we buy theirs (imports, $M$).

Leakages leave the domestic spending stream: $S$, $T$ and $M$. Injections add to it: $I$, $G$ and $X$.

Order without a designer, and when it breaks

Prices coordinate. Frost hits Brazil’s coffee:

1. The world coffee price rises.
2. You drink a little less coffee.
3. Farmers in Vietnam and Colombia plant more.
4. Scarce coffee goes where it is valued most.

Nobody gave an order. The price carried the message.

Disorder happens when the circuit stalls. Banks stop lending (2001, 2008):

1. Firms cut investment and jobs.
2. Households lose income and spend less.
3. Firms sell less and cut again.
4. A vicious circle: recession, unemployment.

Everyone acts sensibly; together they make it worse. Macroeconomics asks: when do markets coordinate, and when do they fail?

Question 3: What is economics?

Three definitions, three centuries

“What is?” versus “What ought to be?”

• Positive statements describe how the economy is or will be: cause and effect. Test: can data prove it wrong? Then it is positive, even if it turns out false.
• Normative statements say what should be: they need a value judgement. Test: look for “should”, “better”, “fair”. Data inform it; values decide it.

The slide asks you to classify four statements:

• “Raising the minimum wage by 50% will reduce youth employment.” - positive (testable cause and effect, true or false).
• “The minimum wage should guarantee a decent life.” - normative (“should”).
• “Inflation in Türkiye hurts renters more than homeowners.” - positive (data can test it).
• “The central bank should care more about growth than inflation.” - normative (a value judgement about priorities).

Question 4: What do economists do?

Where economists work

“Give me a one-handed economist!”

An economist always says “on the other hand”. The other hand is the job. Take a policy question: raise the interest rate?

• Hand 1 - the trade-off. Inflation falls, but jobs and growth fall. Every policy buys something and pays for it. There is no free lunch, only a choice of costs.
• Hand 2 - the uncertainty. By how much, and when? The effect is a range, not a number, and it arrives with a lag. Honest forecasts show the band.

An honest answer = effect + trade-off + uncertainty.

When they fail

November 2008: opening a new building at the London School of Economics, Queen Elizabeth II asked the economists around her why no one had seen the global financial crisis coming.

July 2009: a letter organised by the British Academy blamed “a failure of the collective imagination of many bright people”.

Failure is part of the science. After 2008, banks, credit and leverage moved back into the core of macro models.

Question 5: What skills does it take?

Keynes’s master-economist

Keynes described the complete economist in 1924, reviewing Alfred Marshall:

“He must be mathematician, historian, statesman, philosopher - in some degree.”

The slide ends with a personal question: which one is your weakest?

A working economist’s toolkit

None of these is innate. All of them can be trained.

Question 6: What makes a real economist?

“Qualifications get you hired. Character makes an economist.”

Hayek titled his 1974 Nobel lecture “The Pretence of Knowledge”. Take the hint.

Question 7: Does the world need economists?

Ideas rule the world

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

John Maynard Keynes, The General Theory, 1936.

You will be governed by economic ideas either way. The only choice is whether they are good ones.

So then…

Everyone should know economics. Not everyone should be an economist. What makes the difference? A real economist:

• analyses - takes a question apart and tests it, instead of repeating opinions;
• keeps learning - the degree is the start; reading, data and practice never stop;
• knows the stakes - bad economics is not harmless: it becomes policy, prices and jobs.

Question 8: What will the world demand?

The World Economic Forum’s The Future of Jobs Report 2025 (insight report, January 2025) is built on 1,000+ employers, 14 million+ workers, 22 industries and 55 economies.

Share of employers who expect each trend to transform their business by 2030:

• 60% broadening digital access
• 50% rising cost of living
• 47% climate-change mitigation
• 34% geoeconomic fragmentation

Every one of these forces is macroeconomics.

Jobs to 2030, in three numbers

• 170 million new jobs created by 2030
• 92 million jobs displaced
• +78 million net gain: about 7% of today’s employment

In all, 22% of today’s jobs are expected to be disrupted: created or destroyed.

Fastest-growing skills to 2030

Employers expect 39% of core skills to change by 2030. The fastest-growing jobs in percentage terms: big data specialists, fintech engineers, AI and machine-learning specialists.

Can AI do an economist’s job?

The slide poll offered three answers: A yes, most of it; B parts of it; C no, not the important parts. The answer is B. And it changes the rest.

AI makes answers cheap. That makes good questions and sound judgement more valuable.

Exam practice

Summary and review

• One cup has six supply stages: farm, shipping, import, roaster, café, you. Inputs divide into raw materials, intermediate goods, capital goods, labour and other inputs; the imported part is paid in dollars, the home part in lira.
• Price of a cup = world bean price + exchange rate + domestic costs + tax and margin.
• Coffee belt facts: about 50% of world coffee comes from Brazil and Vietnam; Vietnam’s 2023/24 harvest fell 20% after drought; a 50% loss of suitable coffee land is projected by 2050.
• Price history: 1.2 dollars per kg in 2002 (oversupply); 2.9 to 5.0 in 2014; 3.5 to 5.9 in 2021; 4.5 to 7.6 in 2023-24; about 9.0 in 2025, a record since at least 1992.
• Bean to lira: by 2025 the dollar price rose about 2.5 times, the dollar about 8 times in lira, the same beans about 20 times; about 70% of the lira rise came from the exchange rate; Turkish consumer prices rose roughly 9.5 times.
• Four engines of cup inflation: world supply shock, exchange rate, domestic costs, expectations.
• Cafeteria: costs up and demand down; quantity falls for sure, the price effect depends on which shock is larger; below break-even the firm exits.
• Economy is a number (GDP: market value of final goods and services), a network and a system; economics examines it; an economist does economics properly.
• Circular flow: $Y = C + I + G + (X - M)$; leakages S, T, M; injections I, G, X. Prices coordinate (coffee frost example); stalls create vicious circles (2001, 2008).
• Three definitions: Ricardo 1817 (distribution), Marshall 1890 (everyday life), Robbins 1932 (choice under scarcity). Positive statements are testable; normative ones carry a value judgement.
• Economists work in central banks, statistical offices, government, banks, global institutions, tech, think tanks, media and universities. Honest answer = effect + trade-off + uncertainty. The 2008 crisis was “a failure of the collective imagination of many bright people” (British Academy, 2009).
• Keynes’s master-economist: mathematician, historian, statesman, philosopher (on Marshall, 1924). Toolkit: maths and statistics, programming, economic history, writing and speaking, institutions. Character: curiosity, scepticism, honesty, humility, empathy (Hayek 1974, “The Pretence of Knowledge”).
• Ideas rule the world (Keynes, 1936); everyone should know economics, not everyone should be an economist.
• WEF 2025: 60/50/47/34% trends; 170 million jobs created, 92 million displaced, +78 million net (about 7%); 22% of jobs disrupted; 39% of core skills to change; AI does the routine, helps with the faster work, and leaves the judgement to you.