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Introduction To Economics Ismail Serageldin October 2008.

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Presentation on theme: "Introduction To Economics Ismail Serageldin October 2008."— Presentation transcript:

1 Introduction To Economics Ismail Serageldin October 2008

2 Basic Concepts

3

4 Barter Exchange A B g + s

5 Exchange with Promise to Pay g + s PaPa A B Time 1 g + s PaPa A B Time 2

6 Exchange with third party promise to pay g + s PaPa AB Time 1 g + s PaPa BC Time 2 g + s PaPa AC Time 3

7 Exchange with promise of a Central Bank g + s A Central Bank E BD C PaPa PaPa PaPa PaPa PaPa PaPa PbPb PdPd

8 Cashless System with Central Clearinghouse B E A C D g + s Clearinghouse

9 Public Goods Public goods must not be forgotten Public goods research must be funded Knowledge transfer is a quintessential public good

10 Public Goods Non-excludable Non-Rival Recognized by Adam Smith in The Wealth Of Nations in 1775.

11 Clean Air Is A Public Good

12 Clean Water Is NOT A Public Good

13 R&D expenditures as percent of GDP Source: Ernst & Young, Beyond Borders, Global Biotechnology Report 2006

14 The Private Sector Is Extremely Important 68% of all funding in the US – up from 32% in % of actual R&D in the US is executed by Private sector 63% of Global funding Source: S&E Indicators 2002

15 US R&D Funding, by Source

16 Economics

17 Adam Smith and his Wealth of Nations 1776

18 Adam Smith and the Invisible Hand As every individual, therefore, endeavours as much as he can … to employ his capital …He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. … he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

19 Adam Smith in the Wealth of Nations …[the state is responsible] for erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain.

20 Supply and Demand

21

22 Shifts to new Equilibrium Points

23 Shifts

24 Macro and Micro

25 Understanding GDP

26

27

28 Gross Business Saving Net Taxes Net Taxes Disposable Personal Income

29 Poverty Observed: US and Selected European Countries, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

30 Poverty before Government policy effects US and Selected European Countries, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

31 Policy Effects on Poverty: Pre and Post tax and transfers, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

32 Policy Effects on Poverty: Pre and Post tax and transfers, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

33 Policy Effects on Poverty: Pre and Post tax and transfers, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

34 Policy Effects on Poverty: Pre and Post tax and transfers, 1991 Source: Robert Solow, Welfare: The Cheapest Countryin NYRB, 23 March 2000, p

35 Gross Business Saving Net Taxes Net Taxes Disposable Personal Income

36

37

38

39 Finance And The Real Economy

40 Production, Employment

41 Real World Production

42 Real World Consumption

43 Money!

44 Money and Banking Money supply Credit Banking services (mobilize savings, advance credit)

45 Like Blood Circulation or Respiration are to the Human Body

46 Without it you go back to the barter economy

47 Capital markets Securities (equities) Bonds Credit (loans)

48 Monetary Policy Credit Interest rate Money supply Exchange rate FOREX Banking system: RRR, capitalization, oversight

49 The Central Bank Responsible to maintain the stability of the national currency and money supply Controlling subsidized-loan interest rates Lender of last resort to the banking sector during times of financial crisis (private banks being integral to the national financial system).

50 Central Banks Supervisory Powers To ensure that banks and other financial institutions do not behave recklessly or fraudulently. Instruments: –RRR –Open market operations –Basic interest rate

51 Financial regulations All forms of regulation or supervision, which subject financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization.

52 Other Supervisory Bodies Securities and Exchange Commission (SEC) Rating agencies Audit regulations

53 Economic Policies

54 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

55 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

56 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

57 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

58 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

59 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

60 Objectives of Economic Policy Growth Price stability Employment Exchange rate Income distribution Reserves

61 % annual growth in GDP/person % annual decline in poverty (Headcount index) Growth and Poverty Reduction

62 % annual growth in GDP/person % annual decline in poverty (Headcount index) Growth and Poverty Reduction

63 % annual growth in GDP/person % annual decline in poverty (Headcount index) Jamaica Costa Rica India Malaysia Indonesia Singapore Thailand Taiwan Sri Lanka Mexico Brazil Bangladesh Pakistan Growth and Poverty Reduction

64 % annual growth in GDP/person % annual decline in poverty (Headcount index) Jamaica Costa Rica India Malaysia Indonesia Singapore Thailand Taiwan Sri Lanka Mexico Brazil Bangladesh Pakistan Growth and Poverty Reduction

65 % annual growth in GDP/person % annual decline in poverty (Headcount index) Jamaica Costa Rica India Malaysia Indonesia Singapore Thailand Taiwan Sri Lanka Mexico Brazil Bangladesh Pakistan Growth and Poverty Reduction

66 % annual growth in GDP/person % annual decline in poverty (Headcount index) Jamaica Costa Rica India Malaysia Indonesia Singapore Thailand Taiwan Sri Lanka Mexico Brazil Bangladesh Pakistan Growth and Poverty Reduction

67 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

68 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

69 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

70 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

71 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

72 Macro-policy Necessary but not sufficient Sectoral policies and the development of projects at the grass roots level. Money and credit The importance of the real economy Tradeables and non tradeables Public goods and private goods

73 Social Policy Not the same as The social impacts of economic policies Sound Social policies will have beneficial economic impacts

74 Social Policy Maintain social cohesion Promote social mobility Reduce income inequality Promote gender equality Address the ultra-poor Cultural identity Etc.

75 Employment Mobility, both geographic and occupational Regulations: –Labor laws, –credit, –legalization, –Registration of startups –Incubators –venture capital etc. Fiscal and other incentives (e.g. military service, training tied to jobs, etc.)

76 Critical Transitions

77 Education For Learning & Life

78 Entering The Labor Force

79 Choosing Healthy Lifestyles

80 Forming Families

81 ##81 Becoming Effective Citizens

82 Must Ensure Youth Employment

83 How Much Wasted Talent?

84 How many youthful dreams will remain unrealized?

85 Youth Employment Policies The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices. Include second chances.

86 Youth Employment Policies The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices. Include second chances.

87 Youth Employment Policies The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices. Include second chances.

88 Youth Employment Policies The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices. Include second chances.

89 Empowerment Empowerment of youth (and other groups): –Increase assets –Increase returns held by youth (usually labor and education)

90 The Instruments/Levers Of Economic Policy

91 Fiscal Policies Pattern of public spending (G) Investment and consumption (I+C) Subsidies Taxes Public deficits and surpluses

92 Taxes Income Tariffs Property Transaction (sales or VAT) Capital Gains

93 Borrowing Domestic and foreign Crowding out the private sector The structure of debt Preferred creditors

94 Other Obligations Social Security Insurance Pension Funds

95 Trade Comparative Advantage Fair Trade

96 Monetary Policy Credit Interest rate Money supply Exchange rate FOREX Banking system: RRR, capitalization, oversight

97 Money and Banking Money supply Credit Banking services (mobilize savings, advance credit)

98 A wise balance between regulation and encouraging private initiative

99 Concern with Busioness cycles

100 Counter-cyclical Policies Anti-recession: –Easy money and credit –Tax cuts –Increased government spending Anti-inflation: –Tight money –Higher taxes –Budget surplus

101 Money, Banking And Finance

102 Money and Banking Money supply Credit Banking services (mobilize savings, advance credit)

103 The Lessons Of the Past: Do Not Just Print Money!

104 Hyperinflation! By the end of 1923 the German currency was of no value at all. The quarterly rate of inflation stood at 52,000%, which is the equivalent to an annual rate of 7,000,000,000,000%. In 1924 the currency was replaced with a new currency

105 1 Mark

106 50 Mark

107 10,000 Mark

108 100,000 Mark

109 1,000,000 Mark

110 5,000,000 Mark

111 50,000,000 Mark

112 500,000,000 Mark

113 1,000,000,000 Mark

114 10,000,000,000 Mark

115 From 1 Mark to 10,000,000,000 Mark

116 Worthless Money Using paper money as wallpaper or as fuel

117 Monetary Policy Credit Interest rate Money supply Exchange rate FOREX Banking system: RRR, capitalization, oversight

118 Recapitulation

119 Monetary Policy Credit Interest rate Money supply Exchange rate FOREX Banking system: RRR, capitalization, oversight

120 Fiscal Policies Pattern of public spending (G) Investment and consumption (I+C) Subsidies Taxes Public deficits and surpluses

121 Borrowing Domestic and foreign Crowding out the private sector The structure of debt Preferred creditors

122 Taxes

123 Income Tariffs Property Transaction (sales or VAT) Capital Gains

124 Other Obligations Social Security Insurance Pension Funds

125 Money and Banking Money supply Credit Banking services (mobilize savings, advance credit)

126 Counter-cyclical Policies Anti-recession: –Easy money and credit –Tax cuts –Increased government spending Anti-inflation: –Tight money –Higher taxes –Budget surplus

127 Excessively Reductionist?

128 Vehement Reactions Dehumanizing the humanities Denies individualism Treats people like products or machines Economics is not the whole story Etc. etc.

129 Serageldin on Reductionist Views Three buckets of water and a handful of minerals held together by chemical reactions… A society is more than the sum of its economic and financial transactions…

130 Serageldin on Reductionist Views Three buckets of water and a handful of minerals held together by chemical reactions… A society is more than the sum of its economic and financial transactions…

131 Now, let us turn to the global crisis


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