Download Lecture 26

Review of the previous lecture
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In the long run, the aggregate supply curve is vertical.
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The short-run, the aggregate supply curve is upward sloping.
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The are three theories explaining the upward slope of short-run aggregate supply:
the misperceptions theory, the sticky-wage theory, and the sticky-price theory.
Review of the previous lecture
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Keynes proposed the theory of liquidity preference to explain determinants
of the interest rate.
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According to this theory, the interest rate adjusts to balance the supply and
demand for money.
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An increase in the price level raises money demand and increases the
interest rate.
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A higher interest rate reduces investment and, thereby, the quantity of
goods and services demanded.
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The downward-sloping aggregate-demand curve expresses this negative
relationship between the price-level and the quantity demanded.
Review of the previous lecture
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Policymakers can influence aggregate demand with monetary policy.
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An increase in the money supply will ultimately lead to the aggregatedemand curve shifting to the right.
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A decrease in the money supply will ultimately lead to the aggregatedemand curve shifting to the left.
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Policymakers can influence aggregate demand with fiscal policy.
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An increase in government purchases or a cut in taxes shifts the aggregatedemand curve to the right.
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A decrease in government purchases or an increase in taxes shifts the
aggregate-demand curve to the left.
Review of the previous lecture
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When the government alters spending or taxes, the resulting shift in
aggregate demand can be larger or smaller than the fiscal change.
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The multiplier effect tends to amplify the effects of fiscal policy on aggregate
demand.
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The crowding-out effect tends to dampen the effects of fiscal policy on
aggregate demand.
Lecture 26
The Influence of Monetary and Fiscal Policy on
Aggregate Demand
Instructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400
Changes in Taxes
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When the government cuts personal income taxes, it increases households’ takehome pay.
– Households save some of this additional income.
– Households also spend some of it on consumer goods.
– Increased household spending shifts the aggregate-demand curve to the right.
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The size of the shift in aggregate demand resulting from a tax change is affected by
the multiplier and crowding-out effects.
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It is also determined by the households’ perceptions about the permanency of the
tax change.
Using Policy To Stabilize The Economy
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Economic stabilization has been an explicit goal of U.S. policy since the
Employment Act of 1946.
The Case for Active Stabilization Policy
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The Employment Act has two implications:
– The government should avoid being the cause of economic fluctuations.
– The government should respond to changes in the private economy in order
to stabilize aggregate demand.
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Some economists argue that monetary and fiscal policy destabilizes the economy.
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Monetary and fiscal policy affect the economy with a substantial lag.
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They suggest the economy should be left to deal with the short-run fluctuations on
its own.
Automatic Stabilizers
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Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand
when the economy goes into a recession without policymakers having to take any
deliberate action.
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Automatic stabilizers include the tax system and some forms of government
spending.
Poverty - I
Instructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400
Lecture Outline
1. Introduction
2. How growth affects Poverty
3. Types of Poverty
4. Poverty indices
5. Methods of estimating poverty line
Introduction
•Poverty has many dimension. The poor have not only low incomes but also
lack access to basic needs such as education, health, clean drinking water
and proper sanitation.
•The lack of access to basic needs undermines the capabilities of poor, limits
their opportunities to secure employment and therefore, results in their social
exclusion and exposes them to exogenous shocks.
•The vicious cycle of poverty is accentuated when the governance structures
exclude the most vulnerable from the decision making process.
Growth – Poverty Nexus
•The fight against poverty represents the greatest challenge of our times.
Considerable progress has been made in different parts of the world in
reducing poverty.
•The proportion of people living in extreme poverty on global level fell from
28% in 1990 to 21% in 2001 (on the basis of $1 a day).
•In absolute numbers the reduction during the period was 130 million with
most of it coming from China.
•In Sub-Sahran Africa, the number of poor actually increased by 100 million
during the period. The Central and Eastern Europe also witnessed a dramatic
increase in poverty. Incidence of poverty however declined in South Asia,
Latin America and the Middle East.
Growth – Poverty Nexus
•Recent trends in global, regional and national poverty clearly suggest one
thing and that is, that stronger economic growth over a prolonged period is
essential for poverty reduction. Economic growth reduces poverty because
average incomes of the poor tend to rise proportionately with average income
of the population. This result is robust overtime and across countries and
regions.
•Empirical evidence suggest that a one percent increase in annual rate of
economic growth is associated with a decrease of about 0.9 percent in the
percentage of population living below the poverty line.
How Growth Affects Poverty?
•At the macro level, economic growth implies greater availability of public
resources to improve the quantity and quality of education, health and other
services.
•At the micro level, economic growth creates employment opportunities,
increases the income of the people and therefore, reduces poverty.
•Many developing countries have succeeded in boosting growth for a short
period. But only those that have achieved higher economic growth over a
long period have seen a lasting reduction in poverty – East Asia and China
are classic examples.
How Growth Affects Poverty?
•Growth, however, does not come automatically. It requires policies that will
promote growth. Macroeconomic stability (low budget and current account
deficits, low inflation, stable exchange rate) is therefore, key to a sustained
high economic growth. In the case of Pakistan, a 6-8% economic growth is
essential for poverty alleviation.
•Individual country experiences, however, present a somewhat different
picture. Despite higher economic growth in Thailand, the reduction in poverty
has been modest. Malaysia has been able to achieve both a high rate of
growth and impressive reduction in poverty. Bangladesh on the other hand,
has dramatically reduced poverty in spite of a low economic growth.
Growth Vs Quality of Economic Growth
•For poverty reduction, it is the quality of growth which is more important than
growth.
•Quality of growth implies ‘inclusive growth’. Growth coming from sectors
which employ more unskilled/low skill workforce. For example, contribution to
growth coming from agriculture, particularly livestock and dairy sector, SMEs,
Housing and Construction, Information Technology would be more poverty
reducing growth or ‘pro-poor’ growth or ‘inclusive’ growth.
•Growth is necessary but not sufficient to reduce poverty. Strategy of
promoting growth must be accompanied by improvement in opportunities for
the poor, that is, it must be accompanied by higher investment on people
technical training, vocational training and improvement in delivery of social
services).
Defining Poverty
•Poverty is generally defined as lack of command over resources to satisfy
basic needs, mainly food, shelter and clothing. This approach is basically an
income approach as it measures the degree of lowness of income or
consumption in the society.
•This is an uni-dimensional approach to poverty, which views poverty as
income or consumption deprivation.
•Poverty is not uni-dimensional, rather it is multi-dimensional phenomenon.
Poverty should be viewed as the deprivation of basic capabilities such as illhealth, lack of education, vulnerabilities, powerlessness and social
deprivation.
•Advantages and disadvantages of using uni-dimensional vs multidimensional.
Uni-dimensional approach is simple to use
Multidimensional approach is broader but complex.
Three Types of Poverty
a. Relative Poverty
b. Subjective Poverty
c. Absolute Poverty
a. Relative Poverty: A relative poverty line is set at around 50% of the
average per capita income of the country. This measure is typically used
in developed country.
Drawback: Poverty line is not constant; moves upward with the rise in per
capita income; therefore, it is not appropriate to measure poverty in
developing countries.
b. Subjective Poverty: The subjective poverty line refers to that level of
income at which people feels that their income is just equal to the
minimum income required to meet end need.
Drawback: This is a subjective estimates. People with same level of welfare
may give different answers for their minimum income requirement and
may be treated differently with respect to poor and non-poor.
Three Types of Poverty
c. Absolute Poverty: The absolute poverty line is defined as a minimum
socially acceptable level of income or consumption used to distinguish the
poor from non-poor. The individuals below the poverty line are poor.
Consistency requires that poverty line remains constant in real term across
regions and overtime.
What is Poverty Line?
•A poverty line represents a specific minimum level of income or consumption
needed to satisfy the basic physical needs of food, clothing, shelter, education
and health in order to ensure continued survival.
•The extent of absolute poverty is therefore defined as the number of people
who are unable to command sufficient resources to satisfy the needs.
•The poverty line is set at a level that remains constant in real term so that we
can measure our progress on an absolute level over time.
Key Message: Poverty line must not be
changed
Poverty Indices
Headcount Ratio: It is defined as the proportion of people living below the
poverty line. This measure is easy to calculate. However, it takes no account
of the depth of poverty. The Headcount ratio is nevertheless the most widely
used poverty estimate.
Poverty Gap: Poverty gap measures the depth of poverty. It also measures
the total income necessary to raise everyone who is below the poverty line up
to that line. A lower value would indicate that most of the poor are bunched
around the poverty line.
Method of Estimating Poverty Line
Calorie Intake Method:
• The calorie approach to set the poverty line is based on minimum
food requirements, expressed in terms of calorie intake per day.
• Income vs consumption as welfare indicator
• Consumption is preferred for the following reasons.
 It is smoother than income
 Income is subject to seasonal variability while consumption is less
variable
 Consumption is considered more direct indicator of achievement
and fulfillment of basic needs.
 Respondents in developing countries are reluctant to reveal
income.
 Consumption is more easily observable and measurable
Method of Estimating Poverty Line
• Consumption aggregate is comprehensive. It consists of
 Food items
 Clothing
 Shelter
 Education
 Health
 Fuel and Utilities
• Adjustment of Consumption Aggregate
 While expenditures (food and non-food) are recorded at the
household level, Poverty needs to be measured at the individual
level.
 Adjust consumption expenditure by the size and composition of
household.
 Adult equivalence scale (with weight 0.8 to individuals younger
than 18 years old and 1.0 for all other individuals).
• Poverty line be updated between the two Surveys by price indices.
The most widely used method is to adjust poverty line with CPIbased inflation. This method allows for changes in prices but the
consumption basket associated with poverty line remains
unchanged. Thus poverty line remains constant over time.
Why Poverty Estimates Can Differ?
Poverty estimates are highly sensitive to a variety of factors. The very basis of
drawing the poverty line may differ across researchers.
 Calorie intake approach vs basic needs approach
 Within calorie intake basis some my use 2250 calories; 2550 calories;
or 2350 calories per adult equivalence
 CPI vs SPI vs WPI vs prices (or unit values) as derived from the survey
to adjust poverty line
 Consumption vs income
 Same poverty line for rural and urban areas vs different poverty lines
for the two
 Basket of commodities may differ
Summary
•
At the macro level, economic growth implies greater availability of public
resources to improve the quantity and quality of education, health and other
services.
•
At the micro level, economic growth creates employment opportunities,
increases the income of the people and therefore, reduces poverty.
•
Poverty is generally defined as lack of command over resources to satisfy
basic needs, mainly food, shelter and clothing. This approach is basically an
income approach as it measures the degree of lowness of income or
consumption in the society.
Summary
•
A relative poverty line is set at around 50% of the average per capita
income of the country.
•
The subjective poverty line refers to that level of income at which people
feels that their income is just equal to the minimum income required to meet
end need.
•
The absolute poverty line is defined as a minimum socially acceptable level
of income or consumption used to distinguish the poor from non-poor.