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Macroeconomics

Macroeconomics Basics What is macroeconomics? Seeks to understand changes in The rate of economic growth The rate of inflation Unemployment Trade with other countries Measuring Economic Growth Gross Domestic Product (GDP)

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Macroeconomics

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  1. Macroeconomics Basics

  2. What is macroeconomics? • Seeks to understand changes in • The rate of economic growth • The rate of inflation • Unemployment • Trade with other countries

  3. Measuring Economic Growth • Gross Domestic Product (GDP) • The monetary value of all goods and services produced within a country in a given time period • Real GDP • The volume of goods and services produced within a country (i.e. GDP adjusted for price fluctuations) • Economic Growth: • Percentage rate of increase of real GDP

  4. Measuring Inflation • Annual percentage rate of change in the consumer price index • In the Eurozone: Harmonized Index of Consumer Prices (HICP)

  5. Measuring Unemployment • People out of work and looking for work • Labor force = employed + unemployed

  6. Measuring trade with other countries

  7. Government Policies • Affect aggregate supply and demand, economic output and price level • Short-term effects • Long-term effects

  8. Aggregate Demand/Aggregate Supply • Aggregate Demand • Includes consumption, investment, government spending, exports • Affects output, prices, employment • Aggregate Supply includes • Includes total supply of goods and services produced by a national economy during a particular time period • Reflects productive capacity

  9. Approaches to government intervention • Keynesian economics • Demand-focused • Calls for active government (both on monetary and fiscal policy) • Neo-classical economics • Supply-focused • Focuses mostly on interest rates and money supply • Monetarism (Milton Friedman) • Inflation is a monetary phenomenon (not linked to production) • Rejects fiscal policy bc/ of “crowding out” of the private sector • Objective is to keep rate of growth and money supply constant

  10. Types of Government Policies • Monetary • Fiscal

  11. Monetary Policy • Manipulates money supply and demand through interest rates • Independent Central Banks • Historically recent (Fed since 1913) • Political independence • Sarkozy’s motivations?

  12. Eurosystem (ESCB) • Comprises • European Central Bank • National Central Banks (will continue until all EU members have adopted Euro)

  13. Tasks of the ECB • Sets interest rates • Manages foreign exchange operations • Holds and manages some official reserves of euro area countries • Promotes smooth operation of payment systems • NCBs • Lend to national financial institutions • Ensure settlement of cashless domestic and trans-border payments • Collect national statistics

  14. Decision-making in ECB • Governing Council • Includes Executive Board and heads of NCBs • Executive Board • President, Vice-President, and four more members (appointed jointly by heads of states) • General Council • Includes all heads of NCBs of ALL EU member states • No decision-making power; but oversees progress of member states towards adopting Euro

  15. Eurosystem Strategy • Primary objective: price stability • Definition of price stability: “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”

  16. Other Public Policies • Affect aggregate supply and demand, economy’s output and price level through • Budget deficits • Fiscal Policy • “crowding out” • Investing in productivity (technology policy) • Improving human capital (education) • Improving physical capital (infrastructure) • External relations (e.g. war expenditures in Iraq) • In the EU, these public policies mostly not integrated

  17. Fiscal Policy Goals • Stability and Growth Pact • National government deficit no larger than 3% of GDP • Reduces inflationary pressures (and free-riding) • Main purpose of fiscal policy should be stabilization • But fiscal policy is main tool left to governments where monetary policy is constrained • Evidence that most fiscal policy is pro-cyclical • automatic stabilizer

  18. Source: Financial Times, November 4, 2008

  19. The Eurosystem’s future • Deepening of integration? • Call for more regulatory power of ECB (now banking regulation national) • Call for a political voice for the Eurogroup • Attractiveness of the Euro – has served as buffer in crisis • Denmark • Iceland • Hungary

  20. EU vs. Euro Area Euro area:Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain. EU Member States obliged to adopt the euro eventually: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia (Jan. 1, 2009), Sweden. EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.

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