* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Department of Economics
Survey
Document related concepts
Non-monetary economy wikipedia , lookup
Pensions crisis wikipedia , lookup
Balance of trade wikipedia , lookup
Global financial system wikipedia , lookup
Business cycle wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Exchange rate wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Balance of payments wikipedia , lookup
Money supply wikipedia , lookup
Transformation in economics wikipedia , lookup
Monetary policy wikipedia , lookup
Transcript
Department of Economics University of Toronto Eco 100Y, L0201 – 2006/2007 Professor M. J. Hare [Larkin 336] DETAILED READING LIST AND CONCEPT LIST II INTERNATIONAL FINANCE AND MACRO ECONOMICS [Revised, January, 2007] Lipsey and Ragan: Eleventh Canadian Edition PART K: THE GAMES OF INTERNATIONAL FINANCE Topic 19: ANALYSIS OF THE BALANCE OF PAYMENTS Reading: LR: Chapter 35 to page 892 bottom. Concept List: fixed versus flexible foreign exchange rates balance-of-payments statement: summary of transactions between residents and non-residents of a country within a specified time frame e.g., a year debit/credit accounting system for international transactions – a debit transaction requires the use of foreign exchange and a credit transaction allows for the earning of foreign exchange current account section [Section I]: trade, travel and interest/dividend accounts autonomous [independent] capital account section [Section II]: foreign direct investment[ FDI], international portfolio investment [IPI] and international financial investment [e.g., stock market investment and speculative investment in land and businesses] importance of international portfolio investment in macro economics: sensitive to changes in short term interest rates induced [balancing] capital account section [Section III]: foreign-exchange reserves and international borrowing/lending e.g., most often through the International Monetary Fund [IMF] the balance-of-payments statement for a country must always balance irrespective of whether there is a fixed or a flexible foreign exchange regime differences in balance-of-payments statement between fixed and flexible foreign exchange rates 2 balance-of-payments surplus [Section I and Section II generate a net credit] balance-of-payments deficit [Section I and Section II generate a net debit] under a fixed foreign-exchange rate regime, a deficit on current account can be mostly offset by capital inflows, including foreign direct investment Topic 20: ANALYSIS OF FOREIGN-EXCHANGE RATES Reading: LR: Chapter 35 pp. 892 bottom913 bottom. fixed foreign-exchange rate regime flexible foreign-exchange rate regime managed foreign-exchange rate regime demand and supply curves for foreign exchange for a country when debit transactions occur demand curve for foreign exchange shifts: an increase in a debit transaction will shift the demand curve for foreign exchange to the right and a decrease in a debit transaction will shift the demand curve for foreign exchange to the left when credit transactions occur supply curve of foreign exchange shifts: an increase in a credit transaction will shift the supply curve for foreign exchange to the right and a decrease in a debit transaction will shift the supply curve for foreign exchange to the left demand and supply curve shocks under a flexible foreign-exchange regime which will cause either a depreciation of the local currency or an appreciation of the local currency demand and supply curve shocks under a fixed [pegged] foreign-exchange regime will increase/decrease the balance of payments deficit or surplus balance-of-payments deficit – under a fixed foreign-exchange rate regime, the quantity of debits in Section I and Section II exceeds the quantity of credits – thus the country spends more foreign exchange than it earns at the fixed exchange rate policies to reduce a balance-of-payments deficit story balance-of-payments surplus – under a fixed foreign-exchange rate regime, the quantity of credits in Section I and Section II exceeds the quantity of debits – thus the country spends less on foreign exchange than it earns 3 depreciation and appreciation of domestic currency inflation and exchange-rate shocks [deferred until inflation topic] purchasing power parity U.S. balance-of-payments story under a flexible foreign-exchange rate Thailand’s balance-of-payments story in 1997 under a fixed and then flexible foreign exchange rate PART L: THE GAMES OF NATIONAL-INCOME DETERMINATION Topic 21: A PRESENTATION OF THE NATIONAL-INCOME ACCOUNTING SYSTEM Reading: LR: Chapter 18 [lightly] and Chapter 19 [background for Macro Economics] Chapter 20 [Important] Concept List: definitions of a progressive tax rate; a proportional tax rate and a regressive tax rate types of taxes in Canada [e.g., personal income taxes, corporate income taxes and indirect taxes on goods and services – GST, PST, import duties] macro economic goals: economic growth, full employment [95% employment] and price stability [price index no more than 5% annually – Bank of Canada’s goal is no greater than 3% inflation] potential output and output gap: gap between actual employment and full employment real and nominal national output [GDP]; implicit price deflators and a constant dollars series of GDP measurement of national output [GDP]: the final goods and services approach measurement of national output [GDP]: the factor income approach 4 measurement of national output [GDP]: the value added approach definition of ‘final’ goods and services: goods and services sold to consumers, industry [on capital account], government, the export sector and goods which become additions to physical inventory at the end of the year GDP has two boundaries: space and time -- all economic activities within the country/region are included within the specified period which is usually a year personal expenditure on goods and services [consumption] includes durables [dining room sets], non-durables [food and clothing] and services [entertainment, rent] automobiles purchased by consumers are classified as a consumer durable imputed rent for owner-occupied home is included under consumer services and also in the factor income statement under rent gross domestic investment is the sum of new residential construction, new non-residential construction and new machinery and equipment undertaken during the period: inventory changes [increases and decreases] are also included under the investment category intermediate goods and services – raw materials, energy, services purchases – are inputs which are consumed in the production process [e.g., iron ore and coal and are transformed during the production process into steel and resin into plastic packaging] derivation of final goods and services in a simple three sector economy with no trade, no government and no inventories factor income approach includes [net domestic income at factor cost]: wages, rent, interest and profits – where profits are presented under three categories: corporate profits before taxes, net income of unincorporated farmers and net income of non-farm unincorporated businesses e.g., partnerships and sole proprietors net domestic income at factor cost [sum of all factor income gross of any taxes] plus indirect taxes less subsidies and plus capital consumption allowance [depreciation] theoretically equals the sum of all final goods and services in the final goods approach to GDP capital consumption allowance [CCA] includes depreciation taken on housing, offices and plants and machinery and equipment in the private sector plus depreciation on capital goods in the public sector [roads, buildings]: consumer durables are not depreciated value added represents an industry/sector’s own contribution towards final goods [GDP] detailed elements for the final goods statement detailed elements for the factor income statement 5 net investment definition: gross investment less capital consumption allowance interrelationships between gross investment, net investment, replacement investment and capital consumption allowance and interpretation of negative net investment Topic 22: THE GAMES OF NATIONAL-INCOME DETERMINATION IN A SIMPLE ECONOMY Assume: Price stability in this section Reading: LR: Chapters 21 the determination of equilibrium national income in a simple economy without government, no international trade and no corporate saving the consumption function for a family, based on disposable income the average propensity to consume [APC] the marginal propensity to consume [MPC] the break-even point on the consumption curve the derived savings curve for a family: Sp = Yd - C dissaving the average propensity to save [APS] the marginal propensity to save [MPS] the sum of the two average propensities [APC + APS] equals one the sum of the two marginal propensities [MPC + MPS] equals one a country’s aggregate saving function: straight line approximation linear domestic investment equation where desired investment by entrepreneurs depends upon autonomous investment [independent of the level of Y] and induced investment [dependent on the level of Y] Keynesian investment function: autonomous investment only 6 economy’s equilibrium condition: desired investment [DI] equals desired saving [DS] actual saving [the sum of household saving + corporate saving + government saving] always equals actual investment – the investment which is actually recorded in the national accounts, at all levels of Y: this is an identity unintended increases/decreases in investment [through unwanted and unplanned inventory adjustments] full employment level of Y autonomous investment shock to achieve full employment level of Y the simple investment multiplier; the multiplier process and the multiplier formula the multiplier is a function of leakages: principally the marginal propensity to save, the marginal propensity to tax and the marginal propensity to import the multiplier process causes the increase in Y to be greater than the positive/negative autonomous shock to the economy the multiplier is always positive and greater than one the investment-saving presentation converted to the aggregate expenditure approach [both approaches will generate the identical equilibrium level of Y] Topic 23: THE GAMES OF NATIONAL-INCOME DETERMINATION IN A FULL ECONOMY WITH GOVERNMENT AND TRADE Reading: LR: Chapter 22 [Including appendix] addition of the government sector adds: taxes, transfer payments, government expenditure and government saving addition of the international sector adds exports and imports [Note: Do not like the text presentation which combines the effects of exports and imports and converts these to a net export function. Why? The determinants of imports and exports are entirely different. the equilibrium condition is now: Y = C + Id + G + E - M [Do not like text’s presentation of net exports] 7 disposable income is defined as: Yd = Y - taxes + transfer payments - corporate saving the spending multiplier now becomes: Ks = 1/ 1-[MPCy + MPId + MPG + MPX - MPM] when an autonomous shock occurs [i.e., when the Aggregate Expenditure Curve is shifted vertically up or down], then the change in Y becomes the product of the spending multiplier times the vertical shift in the Aggregate Expenditure Curve disposable income equals consumption plus personal saving [Yd = C + Sp] the impact of an autonomous tax shock, or a transfer payment shock, will cause the consumption function to shift vertically by the product of the MPCYd times the amount of the autonomous change in taxes [with a negative sign] or transfer payments [with a positive sign]. the behavioural equations for consumption, investment, government spending, exports, imports, taxation, transfer payments and corporate saving would always be specified in a question the consumption function will usually be defined in terms of Yd, with its slope MPCYd – however, to solve a system of equations, it will be necessary to convert the original consumption function to a function of Y, with its slope MPCy Note: if any other behavioural equations e.g., imports, were initially a function of Yd, then this behavioural equation would also require conversion to a function of Y. When the system is solved, all behavioural equations must be established as functions of Y, and not Yd the national-income determination problems will involve two exercises: a. solve the original set of behaviour equations to obtain the initial equilibrium level of Y; b. evaluate the impact on the initial level of Y, when an autonomous shock occurs the balanced budget multiplier theorem the autonomous shock necessary to bring the economy for a full employment level NOTE: The aggregate expenditure model can not satisfactorily handle inflation. 8 Topic 24: AGGREGATE DEMAND AND SHORT RUN AGGREGATE SUPPLY ANALYSIS [Note: Long Run Aggregate Supply Curve is not included] Reading: LR: Chapter 23 Concept List: diagrams show price level on the y-axis and real national income [Y] on the x-axis three reasons for downward slope of aggregate demand curve [AD]: - inflation and trade - inflation and savings impact - inflation and interest rate impact on net investment shifts in AD curve occur through the use of monetary policy and discretionary fiscal policy short run aggregate supply curve [SRAS] and its three sections: perfectly elastic, upward sloping and vertical assumptions behind SRAS curve: - no change in the average unit cost of production in the economy - no change in the labour productivity in the economy the Keynesian/price stability part of the SRAS curve equilibrium established under AD/SRAS curve analysis an easy money policy, or an expansionary fiscal policy, could lead to an increase in real output and to an increase in the price level at the same time 9 PART M: THE GAMES OF BANKING AND MONETARY POLICY Topic 25: THE ROLE OF CHARTERED BANKS IN MONETARY POLICY Reading: LR: Chapter 27 Concept List: money as a store of wealth and money as a medium for exchange Canadian branch banking system and the chartered banks “near” banks – trust companies, loan companies, financial co-operatives etc. balance sheet of chartered/commercial banks and balance sheet of Bank of Canada demand versus time deposits cash reserves of chartered banks [accounts receivable from the Bank of Canada and Canadian currency held by banks – Canadian coin and Bank of Canada notes] cash reserve ratio [no longer required by the Canadian Bank Act] M1 money supply [demand deposits of chartered banks plus currency in circulation– CIC] currency in circulation = Bank of Canada notes and Canadian coin held by Canadian nonchartered bank businesses and individuals [government holdings are excluded] multiple generation/contraction of the M1 money supply the generation banking sequence and deposit creation and contraction the banking multiplier 10 five shocks on cash reserves, M1 money supply, currency in circulation and bank deposits - transactions between Canadian businesses or individuals which do not affect cash reserves - the Bank of Canada’s open market transactions [OMO] - individual/business deposits/withdrawals from chartered banks - Government of Canada uses its account at the Bank of Canada to pay bills or to receive funds - international transactions which involve a business, a chartered bank and the Bank of Canada Topic 26: ANALYSIS OF MONETARY POLICY AND CENTRAL BANKING Reading: LR: Chapters 28 and 29 Concept List: the role of the central bank [achieving price stability and full employment] “easy” money policy/”tight” money policy price of a bond in simple circumstances: coupon interest divided by effective interest rate demand for money: the sum of the transaction demand and the speculative demand liquidity preference curve [speculative demand for money] marginal efficiency of investment curve [reflects the expected/normal rate of return on net investment projects] the transmission mechanism elasticity conditions for effectiveness of monetary policy through the transmission mechanism effectiveness of an “easy” monetary policy effectiveness of a “tight” monetary policy the Keynesian liquidity trap 11 monetary policy under a fixed foreign exchange rate regime with a balance-of-payments deficit monetary policy under a fixed foreign exchange rate regime with a balance-of-payments surplus Bank of Canada policy with respect to allowable inflation levels [‘core’ inflation targeting] demand for money as a function of changes in the nominal level of GDP – an increase in nominal GDP will cause an increase in the demand for money the quantity theory of money: MV = PQ where M = money supply; V = velocity of circulation of money supply and PQ equals GDP 12 PART N: THE GAMES OF FISCAL POLICY, NATIONAL DEBT AND INFLATION Topic 27: ANALYSIS OF DISCRETIONARY FISCAL POLICY Reading: LR: Chapter 24 [pp. 611 top to 619] and Chapter 31 [lightly] Concept List: [Note: Ignore Analysis of LRAS] fiscal policy versus discretionary fiscal policy automatic stabilizers effectiveness of government spending shocks effectiveness of government taxation shocks federal deficit “fiscal drag” cyclical unemployment versus frictional unemployment NAIRU = the non accelerating inflation rate of unemployment, or the natural rate of unemployment Topic 28: NATIONAL DEBT ANALYSIS Reading: LR: Chapter 32 Concept List: federal government deficit/surplus [Sg] components of federal deficit/surplus -- Sg: tax revenue, transfer payments and government purchases of final goods and services national debt – the sum of all previous levels of federal deficits/surpluses the direct burden effect of a federal government deficit: a fallacy indirect burdens of a federal government deficit 13 opportunity cost of inability to use tax reductions to correct for a recession because of a large federal government deficit the “crowding out” effect the current Canadian fiscal dividend federal debt reduction when the economy has not attained a full employment position Topic 29: AN ANALYSIS OF INFLATION Reading: LR: Chapter 30 Concept List: real versus nominal: GDP, wages, interest rates, rent etc. causes of inflation: - printing money - demand pull - cost push inflationary expectations and inflationary psychology impacts of inflation: - adverse impact on balance of trade [under a fixed foreign exchange rate regime] - acts like a regressive tax on some economic groups - induces higher risks for entrepreneurs which works to discourage investment - generates capital flight - distorts savings and investment into short run “windfall” profit opportunities techniques to control inflation: - “tight” monetary policy 14 - restrictive fiscal policy - an incomes policy – price and wage controls stagflation and AD/SRAS analysis Phillips Curve concept: trade offs between unemployment and inflation PART O: MACROECONOMICS AND THE INTERNATIONAL SECTOR: AN INITIAL LOOK Topic 30: THE BALANCE OF PAYMENTS EFFECT UNDER A FIXED FOREIGN EXCHANGE RATE REGIME Concept List: monetary policy under a fixed foreign exchange rate regime impacts on trade, particularly imports impacts on international portfolio investment [IPI] balance-of-payments effect for an “easy” monetary policy under a fixed exchange rate regime balance-of-payments effect for a “tight” monetary policy under a fixed exchange rate regime balance-of-payments effect for an expansionary fiscal policy under a fixed exchange rate regime balance-of-payments effect for a restrictive fiscal policy under a fixed exchange rate regime 15 PART P: PRODUCTIVITY GROWTH AND IMPROVED STANDARD OF LIVING Topic 31: THE GAME OF PRODUCTIVITY GROWTH [Revised for 2006/2007] PART P: PRODUCTIVITY GROWTH AND IMPROVED STANDARD OF LIVING Topic 31: THE GAME OF PRODUCTIVITY GROWTH Reading: LR Chapter 26 Plus Readings Below Which Are Included in Extracts: Productivity/Technological Change Reading 1: ***Lipsey, Richard G., Economic Growth, Technological Change and Canadian Economic Policy, Benefactors Lecture, 1996, C. D. Howe Institute, pp. 1 to 21; 29 to 37; 44 to 52 and 80 to 84. Productivity/Technological Change Reading 2: ***Krugman, Paul, The Age of Diminished Expectations, Third Edition, Chapter 1 Productivity/Technological Change Reading 3: **Baumol, William J., Blackman, Sue Anne Batey and Wolff, Edward N., Productivity and American Leadership: the Long View, Chapters 1 to 3 Productivity/Technological Change Reading 4: ***Easterly, William, Chapter 3, Solow’s Surprise: Investment is Not the Key to Growth in The Elusive Quest for Growth, 2002, pp. 47 to 69. Productivity/Technological Change Reading 5: ***Sharpe, Andrew, The Stylized Facts of the Canada-U.S. Manufacturing Productivity Gap, paper presented to the CSLS Conference on the Canada–U.S. Manufacturing Productivity Gap, Centre for the Study of Living Standards, pp. 1 to 8 and Tables 8, 9, 10, 11 and 12. 16 Productivity/Technological Change Reading 6: ***Sharpe, Andrew, Recent Productivity Developments in Canada and the United States: Productivity Growth Deceleration versus Acceleration, Centre for the Study of Living Standards in International Productivity Monitor, Number 8, Spring 2004, pp. 16 to 26. Productivity/Technological Change Reading 7: ***Lewis, William W., The Power of Productivity: Wealth, Poverty and the Threat to Global Stability, 2004: Prologue and Chapter 1, Findings: The Global Landscape, 2004, pp. ix to xxxi and pp. 1 to 20. Concept List the results of the 1956 Solow model; definitions of productivity: labour productivity and total factor productivity relationship between labour productivity increases and increases in GDP per capita increases in the standard of living of industrial economies and advances in standards of living in the long run [Krugman] sources of increase in GDP per capita: short run versus long run [Krugman] source of productivity growth: technological change, investment in human capital, economies of scale and improved resource allocation; the convergence thesis the Canadian manufacturing productivity gap the Canadian “prosperity” or standard of living problem gap the Canadian business sector’s fifteen year strategy proposal the analysis by William Lewis on the United States and Japan