Macroeconomics - the story so far (from G11) - What do you remember?

Review Macroeconomic outcomes and level of economic activities – GDP, real GDP, GDP growth (OR GNI) – inflation, – unemployment rate/level, AD-AS Model Two schools of thought - New Classical/Monetarist – Keynesian

The basic AD/AS model AD = C + I + G + NX (X – M) AS = function(Labor, Land, Capital, Entrepreneurs) = function ( COSTS)

The Two Macroeconomic Schools of Thought

 Evaluation What are the economic objectives for a government? High and growing GDP and GDP per capita – Low unemployment rate – Low and stable inflation rate Low and reasonable income inequality (plus : favourable exchange rate and balance of payments))

Ultimate Questions: – Can we consistently manage GDP growth with low and stable inflation and low unemployment? Is it an easy task? – Moreover, is equitable growth possible? Growth for all? If not, where do we strike a balance between growth and equity/equality???

GDP Around the World There are 243 countries as of 2013, top 43 countries owns over 90% of the GDP in 2013

In preparation for Development Economics Is the world economy working for all? Looking at the whole world as one (instead of individual countries), is there equality across the globe? What are the roles of International Organizations such as UN, World Bank, IMF, WTO, etc.? Are they doing their job?

Inflation Around the World The highest inflation rates today are seen in the developing world and in crisis countries e.g. South Sudan highest with 79%, Syria 37%, Iran 32% Zimbabwe in crisis, in 2008 reached 79,600,000,000% monthly inflation rate Former USSR countries transiting to Market Based Economy: Hungary, Poland, Czech Republic, Ukraine, Eastern Germany, etc. also reached record high rates!

Unemployment Rate Around the World

Gini Index and Income Inequality

Can High GDP and Income Equality Co-exist? Equitable Economic Growth possible ?

Summarising It is not a simple and easy task to achieve the desirable macro-economic outcomes During the 1980s a lots of economists studied macroeconomic dynamics and management But inflation/deflation, unemployment, inconsistent GDP growth persist Moreover, financial crisis on the scale of the 1930s Great Depression continues to happen i.e. the recession after the Lehman Shock

Available Policies – 1. Demand Side Policies – 2. Supply Side Policies Within Demand-Side Policies: FISCALMONETARY Expansionary (Loose) Contractionary (Tight)

Demand Side Policies Demand side policies (demand management) are policies focused on changing the AD to achieve economic growth, fully employment, and price stability Our focus is on the determinants of C + I + G + NX Two major types and classifications: – Discretionary policy Fiscal Policy Monetary Policy – Non-discretionary policy Automatic stabilizers e.g. progressive income tax and UE benefits

Fiscal Policy Fiscal policy refers to manipulations by the government of its own expenditures (G) and revenues (T) to influence the level of AD – For the Japanese government’s budget, what were some of the components of their spending? And types of taxes? But fiscal policy also affects the other 3 AD components – Consumption (C): consumption and income tax – Investment (I): business and corporate tax – Net Exports (NX): tariffs and quotas

Monetary Policy Monetary policy are the manipulation of the money supply and interest rate by the central bank to influence the borrowing of money and thereby the level of AD What is: – Central bank? – Money? Any medium that is acceptable as payment for goods and services – Interest rate? It is the price of borrowing money which depends on length of time of borrowing, size of loan, inflation rate, etc. (risk and uncertainty involved with time) – The interest rate is determined using the usual Demand and Supply for the money/loanable funds market

How interest rate affects AD Changes in interest rates ultimately affect two of the four components of aggregate demand – Consumption (C): e.g. large purchases that require borrowing like cars, houses, university tuition, etc. – Investment (I): e.g. building a new factory, purchasing a very expensive inventory and machine that will likely to increase future production

NOT YET DONE from here onwards

2 Main Scenarios for Intervention

Expansionary Fiscal and Monetary Policy In face of deflationary/recessionary gap, what would you do? – Fiscal policy: ↑G, ↓income tax, ↓ business tax – Monetary policy:↑ money supply,↓ interest rate