Transcript Document

I. Macroeconomics and
Economic Policy
I.1 Macroeconomics
Scope of Interest, Essential
Data
I.1.1 Long-term economic growth
• Differences among countries/regions
• Factors of growth
• Growth of what? (see Lecture II)
– GDP vs. Wealth
– Real vs. nominal
Real GDP p.c., 1870 – 2009: USA, CND,
AUS, J
1990 International Geary – Khamis dollars
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1870
1880
1890
1900
1910
USA
1920
1930
Canada
1940
1950
Australia
1960
1970
Japan
1980
1990
2000
Real GDP p.c., 1870 – 2009: USA, CND,
AUS, J
1990 International Geary – Khamis dollars, log scale
100,000
10,000
1,000
100
1870
1880
1890
1900
1910
USA
1920
1930
Canada
1940
1950
Australia
1960
1970
Japan
1980
1990
2000
Real GDP p.c., 1870 – 2009: F, D, I,
UK
1990 International Geary – Khamis dollars
25,000
20,000
15,000
10,000
5,000
0
1870
1880
1890
1900
1910
1920
France
1930
1940
Germany
1950
Italy
1960
1970
UK
1980
1990
2000
Real GDP p.c., 1870 – 2009: F, D, I,
UK
100,000
1990 International Geary – Khamis dollars, log scale
10,000
1,000
1870
1880
1890
1900
1910
1920
France
1930
1940
Germany
1950
Italy
1960
UK
1970
1980
1990
2000
Real GDP p.c., 1900 – 2009: ARG, S
1990 International Geary – Khamis dollars
30,000
25,000
20,000
15,000
10,000
5,000
0
1900
1910
1920
1930
1940
1950
Argentina
1960
Sweden
1970
1980
1990
2000
Real GDP p.c., 1900 – 2009: ARG, S
1990 International Geary – Khamis dollars, log scale
100,000
10,000
1,000
1900
1910
1920
1930
1940
1950
Argentina
1960
Sweden
1970
1980
1990
2000
GDP p.c. in 1900 and 2009 and average
growth rate
35,000
1990 International Geary-Khamis dollars
30,000
3.0%
2.5%
25,000
2.0%
20,000
1.5%
15,000
1.0%
10,000
0.5%
5,000
0
0.0%
1900
2009
AGR(%)
I.1.2 Economic cycle
•
•
•
•
Short-term fluctuations of GDP growth
Factors of the cycle
Is the cycle inevitable?
Boom vs. recessions, link to politics and
election cycle
• Economic crisis, depressions
• After last (2008-2009) depression: crisis of
macroeconomics both as theory and as
policy guidance
Real GDP, %yoy
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
1980
1984
1988
1992
1996
EU
USA
2000
2004
2008
2012
Inflation
• Different measures: CPI (prevailing), GDP
deflator and others (see different Lectures
later)
• What´s so wrong about inflation?
• The specter of hyperinflations (see Lecture V)
• Is low inflation always desirable (see
discussion on recent macroeconomic
problems)
• A crucial change in inflation since 1950s:
almost always positive (compared to previous
periods)
Inflation (CPI), %yoy
16
12
8
4
0
1980
1984
1988
1992
1996
-4
EU
USA
2000
2004
2008
2012
Unemployment
• See your macroeconomic textbook (e.g.,
Dornbush, Fischer, Mankiw or Blanchard)
for definitions (and also see Lecture II)
• Unemployment and negative social
phenomenon
• Link between inflation and unemployment
– is there a negative correlation in the shortterm („trade-off“)?
– Almost no correlation over the long-term
Unemployment, %
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1991
1995
1999
Euro area
2003
UK
2007
USA
2011
Inflation vs. unemployment, %
short-term
4.5
12.0
4.0
10.0
3.5
3.0
8.0
2.5
2.0
6.0
1.5
1.0
4.0
0.5
0.0
1991
1995
1999
2003
2007
2011
2.0
-0.5
-1.0
0.0
EMU Inf
US Inf
EMU Unemp (r.h.)
US Unemp (r.h.)
UnRate
CPI (rhs)
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
Inflation vs. unemployment, %
US, long-term
12.0
16.0
14.0
10.0
12.0
8.0
10.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
Governments: Deficits and Debts
• Deficit: the difference between revenues
and expenditures of a particular
government
– Easy said, difficult to define and statistically
cover
– Net vs. Gross (interest payments)
• Debt: on most general level – a public
finance debt (total for the country) to both
private and public creditors
– Net or Gross again
• Definitions and some data – see Lecture II
Government Net Deficit, %GDP
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
1991
1993
1995
1997
D
1999
E
2001
IRL
2003
GRE
2005
USA
2007
2009
2011
Government Net Debt, % GDP
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1991
1995
1999
D
2003
E
GRE
2007
US
2011
Current Account Deficit (CAD)
• Each country has (today immense)
economic (trade, financial, etc.)
relations with the rest of the world
• CAD: the difference between total
exports and total imports of goods and
services of a particular country
– For more details see Lecture II
Current Account Deficit, %GDP
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
1991
1993
1995
1997
1999
2001
D
2003
GRE
2005
2007
2009
2011
I.2 Macroeconomics
Descriptive (Positive) Theory
Macroeconomics
• Describes the economy on the highest
level of aggregation
• Focus on macroeconomic aggregates,
namely GDP (GNP), consumption,
savings, investment, money, inflation,
unemployment, public finance deficit,
current account deficit, public debt,
exchange rate, interest rate and others
• Confines the analyses to following five
sectors
Sectors on macroeconomic level
(1)
• Households: all population, own and
provide factors of production (labour,
land, capital) to the firms, receive
payments (income) from them and
generate expenditures for goods and
services (for final consumption)
• Firms: “own” technology, employ factors,
produce goods and services for final
consumption (households, government,
export) or for intermediate use (other
firms, incl. foreign)
Sectors on macroeconomic level
(2)
• Government (state):
– Collects taxes
– Manages activities that society expects from it:
• spends on goods and services for public
purpose (e.g. defence), on employees in state
administration, even owns some firms (that
produce goods and services) – “produces”
public services
• finances transfers and social benefits
• Financial sector: provides transmission services that
channel money from savers to borrowers (incl.
government)
• Foreign sector: purchases goods and services
(exports), sells goods and services (imports),
generates flows of capital out and into the domestic
country (FDI in or out, debt financing, equity capital)
Theory and models
• Formalized relationship among
economic variables (linked to statistical
indicators)
– Forms: verbal, graphical, mathematical
• Building blocks:
– Markets and agents
– Focus of the model: endogenous variables
– External environment: exogenous
variables
Structure
• Structure of the model (based on theory):
system of equations (functional forms,
parameters)
• Solution of the system: equilibrium values
of endogenous variables
• Concept of equilibrium: in some
models/theories, equilibrium as a state of
the rest, on some markets supply does not
have to equal demand
• Disturbance to equilibrium: change in
exogenous variables, behavioural and
structural changes (change in parameters
or functional forms) or a random shock
Time, static and dynamic models
• Static model
– Equilibrium: given exogenous variables, the model
determines endogenous variables in a specific time
moment
– Comparative statics: given the change in exogenous
variable(s), the endogenous variables adjust between
two specific time moments, multipliers
– Time length between the two moments: short,
medium or long term adjustment
• Dynamic (growth) model – determines the development
of endogenous variables in time (growth trajectory)
– Initial conditions
– Assumptions about the time development of
exogenous variables
• Most of our course: static models and comparative
statics
I.3 Economic policies
Normative Theory
Towards “the norms” (1)
• Descriptive theory tells us what is,
normative theory tells us what ought to be
• No formalization of normative theories
here, but intuitively, what is “desired”?
– Stable improvement of society’s welfare
– Fair distribution of the welfare among the
members of the society
– In today’s globalized world, convergence of
standards of living in the different regions of
the world
– Respect to future generation
• Externalities (like environment)
• Avoid excessive today’s debts being repaid in the
future
• Policies, executed by state, as a tool to
achieve the norm (“a desired situation”)
Potential confusion I
• Differentiate: happiness, well-being,
welfare, living standard, economic level
• Macroeconomic policies, focused on
production of goods and services
(GDP)and employment, decisively affect
only last two terms
– They do significantly affect other three as
well, but more as necessary, but not
sufficient condition
– Many other factors do influence people’s
happiness and well-being
Role of the state
• Different role of the state
• In modern history – 3 approaches how
to meet the norms
Adam Smith
• 1723 – 1790
• Political economist
and philosopher
• 1751 – professor of
logic at Glasgow
University
• 1759 – Theory of
Moral Sentiments
• 1776 - An Inquiry in
the Nature and
Causes of the Wealth
of Nations
Laissez faire capitalism
• Free market and political democracy
• Price as basic signal for production
decisions (what, how, for whom)
• Private ownership of means of production
• Small government and minimal
governmental policies/interventions
• Efficient allocation of the resource
assumed to be achieved via market
efficiency
Karl Marx
• 1818 - 1883
• Philosopher, sociologist,
historian, political
economist, political theorist,
revolutionary socialist
• Communist Manifesto (1848,
with Friedrich Engels)
• Das Kapital (volume I 1869,
volume II and III published
posthumously)
• Ideological founder of
Marxism
Central planning (socialism)
• Consumption decided and resources
allocated through the planning system,
not according price signals
• State ownership of productive means
• Equal distribution of the wealth
• Inconsistency with political democracy,
need for centralized political power
John Maynard Keynes
• 1883-1946
• Cambridge, UK
• Thinker – economics,
logic, probability
• Practitioner –
Treasury during WWI,
advisor to the War
Cabinet at WWII,
crucial role at the
birth of IMF/WB
Mixed capitalist economy.
• Prevailing private ownership,
cohabitating with the state ownership
of certain assets
• Free market cohabitating with
governmental policies to cope with the
deficiencies of the free market
• Welfare state policies.
General role of the state (1)
• State executes different policies/interventions
that affect general welfare of the society
• Different groups (with different vested
interests) may have different thoughts about
the role of state here, examples:
– Efficient allocation of the resources ⇒ cultivating
the markets, regulatory and competition policies
– Provision of essential services (e.g. basic education,
defence)
– Attempting to achieve a fair distribution of wealth
across the society ⇒ welfare policies
– Ensuring society’s needs (police, defence, legal
system, coping with the externalities, etc.) ⇒ general
role of state, not a policy
General role of the state (2)
– Transfer payments, providing minimal living
standards (social policies, e.g. unemployment
benefits)
– Long-term social policies, e.g. securing the stable
health care and pension systems
– Regulation of natural monopolies
– External social costs (e.g. drugs) and benefits
(e.g. free vaccination) of the society
– Support to industry and commerce
Macroeconomic policies (1)
• Fundamental measure of the economy:
income(output), expressed as gross
domestic product (GDP, see next lecture)
• GDP development over time - GDP
growth:
– Over long period: long term growth
• In search policies the determine the long-term
differences in economic level among the countries
– Over shorter period: business cycle
• In search policies that help to overcome the
fluctuations of GDP
Macroeconomic policies (2)
• Other basic economic variables, closely
interlinked with/influencing both short- and longterm GDP growth (all the concepts will be shortly
explained in Lecture II and III)
–
–
–
–
–
–
–
–
(un)employment
inflation
Interest and exchange rate
Components of aggregate demand: household
consumption, private investment, expenditure of the
state, exports, imports
Factors, determining the aggregate supply: amount
of capital and labor available, general productivity of
country’s economy
Public finance deficit
Debt of public and private sector (and sum of both)
Current account deficit and balance of payments
Macroeconomic policies (3), but …
• When translated into policies, this entails
–
–
–
–
Fiscal policy
Monetary policy
Exchange rate policy
International trade policy
• However, since WWII, many other policies emerged
–
–
–
–
Supply-side policy
Price and income policies
Employment policy
… and maybe some other policies (according the
ideology, political inclination and maybe populism of
policy-makers)
• in this course we almost exclusivelly cover only the
policies above
Some examples (1)
Best illustrated by following examples:
• Was the growth difference between 0-1800 and
1801-2000 result of some organized
„governmental“ activities?
– The power of markets?
– Adam Smith, invisible hand
• Was the Great Depression a result of the
market failure?
– Many believe yes (but not all).
• Was an extraordinary growth after WWII a
result of a careful economic policy of the
governments?
– Many macroeconomists 40 years ago convinced that
yes (but in reality, it was not)
Some examples (2)
• Was the state intervention responsible for
the high US inflation in 60‘s, EU high
unemployment till today or Japanese
problems in the 90‘s?
– Very probably yes.
• Was the unexpected outbreak of global
financial and economic crisis after 2007 a
failure of macroeconomics as a basis of
proper policy formation?
– Many people believe yes, your teacher not …
Literature to Lecture I
Prerequisite - microeconomics:
• Any text from VSE or IES FSV UK
• Varian, H.R.: Microeconomic Analysis. W.W.Norton&Company,
New York, 1984 (2nd and subsequent editions plus Czech
translation).
• Henderson, J.M., Quandt, R.E.: Microeconomic Theory. McGraw
Hill, 1958 (and subsequent editions).
Prerequisite - macroeconomics:
• Any text from VSE or IES FSV UK.
• Mankiw, G.N.: Macroeconomics, Worth Publishers, New York, 1992
(and subsequent editions).
• Blanchard, O.: Macroeconomics, Prentice Hall, 1997 (and
subsequent editions).
Data:
• Maddison, A.: The World Economy, A Millennial Perspective,
OECD, 2001.
• Main sources:
– IMF (World Economic Outlook (www.imf.org/external/data)
– Eurostat (http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes)
– Ameco, data base of the European Commission
(http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm)
– National Statistical Offices and Central Banks (ECB, FED, but also CNB)
– In the US, also US Burreau of Labor Statistics