Download Department of Economics

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
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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
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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
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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]
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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.
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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
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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
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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
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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