Download Economy of Ireland (EC2020) Tutorial 3 – MT Term Teaching Week 5

Economy of Ireland
(EC2020)
Tutorial 3 – MT Term Teaching Week 5
Plan for today
•
Any issues/questions?
•
Question B1 parts (i), (ii) and (iii) – these questions are more
philosophical in nature
•
(i) Are people the best judges of their own welfare and if not who
else is? Who should be included in arriving at the aggregate
welfare for Ireland: immigrants, the Irish abroad, future
generations?
•
(ii) Comment critically on the links between GDP per capita and
human welfare.
•
(iii) Examine critically the concept of competitiveness and why it
matters so much for a small regional economy like Ireland’s,
especially as we are now in the euro zone.
B1 (i)
• (i) Are people the best judges of their own welfare
and if not who else is? Who should be included in
arriving at the aggregate welfare for Ireland:
immigrants, the Irish abroad, future generations?
• NB: There are two parts to the question and you
must answer both!
• Also, try to have a coherent whole
answer/story/argument across both parts
B1 (i)
• Are people the best judges of their own welfare?
• That people are the best judges of their own welfare
is an implicit assumption behind most of positive
(value-free) economics.
• The idea is that individuals know their own
preferences (information) and, therefore, they
should be allowed to make the choices that
maximize their welfare.
• A quick ‘Straw Poll’.
B1 (i)
• Unfortunately, it’s not a simple question, as there is
no definitive answer that everyone can agree on.
• So, we need to think about it and argue for a position.
• Who might not be the best judge of their own
welfare?
• First, a simple example…
B1 (i)
B1 (i)
• So, maybe not children, people with very severe
disabilities … ?
• How about everyone else? Do we think everybody
else/most people are the best best judges of their own
welfare?
• We can think of people doing lots of ‘nutty’ things,
however, that doesn’t mean they don’t know what’s
welfare maximizing for them.
• So, why might people not be the best judges of their own
welfare? … It’s a more fundamental issue.
• Question to think about: How are our preferences formed?
B1 (i)
• Our tastes/preferences are affected by:
• Advertising
• Peer pressure
• Personal biases - - behavioral insights (e.g. myopic /short
sighted behavior, inertia/status quo bias … see Economy
of Ireland pages 117 & 118 for more examples).
• Informational problems - - markets often under provide
relevant information (market failures).
B1 (i)
•
Wider Social Policy: even if we do accept people the best judges of their own
welfare we have to take account of spillover effects - - e.g. negative externalities.
•
What can we/should we do about this?
•
We often regulate markets - - age restrictions on certain products,
•
We ban certain markets - - markets for organs
•
You can think of these regulations as appearing on a sliding scale from total
autonomy to strong paternalism. Where on the scale would you position society?
•
Extra question to think about: who should we cede this control to - - i.e. if you are not
the best judges of your own welfare, who is? The government? The Church?
Corporations? …
B1 (i)
•
A definition of the ‘well-being’ of Irish society
•
Key issue: who do we include in Irish society (or, should this be
broader than just Irish?)?
•
Ws = F(Wi), where i = 1 to N
•
Wi = f (A, B, C, D)
•
where A is material welfare, B is leisure time, C non-material
goods (friends, community etc.), D is non-private goods - d (things
we all own and benefit from, like environment, nature, street
lighting, etc.)
•
Note: each has an impact on well-being and they interact with
each other
B1 (ii)
•
(ii) Comment critically on the links between GDP per capita and human
welfare.
•
Not a question about measurement!!!! Think of the impact GDP per capita can
have on human welfare.
•
GDP per capita - an aggregate measure of production equal to the sum of
the gross values added of all resident institutional units engaged in
production (OECD) … in a particular frame of time)
•
Human welfare = f (A,B,C,D) ?
•
What is the important policy objective?
B1 (ii)
•
Some arguments for growth and how it can have a positive impact on
human welfare:
•
Relationship between A,B,C,D: Strongly correlated with other
components - A rising has an effect on B, C and D. Increasing A should
increase well-being and all of the evidence shows that it does.
•
Begin unemployed has a strong effect on well-being - hence captured by A.
•
Facilitation of social change argument - it is politically easier to
redistribute in a growing economy. But this doesn’t necessarily happen
(See next slide)
•
Power (see the last column on the next slide)
•
Think of absurdity of the opposite - we should reduce growth!
B1 (ii)
B1 (ii)
•
Some arguments against focusing on growth due to a negative
impact on human welfare:
•
Growth, not necessarily maximizing growth – intergenerational
issues
•
Impact on D - - e.g. community life, environment, stretching
resources
•
Growth attracts migrants and this can lead to societal and
distributional issues (jobs/wages example)
•
Easterlin paradox: within a country, people with higher incomes
are happier, but not across countries and time
• http://www.iea.org.uk/sites/default/files/publications/files/upldbook
416pdf.pdf (page 16)
B1 (iii)
•
(iii) Examine critically the concept of
competitiveness and why it matters so much for a
small regional economy like Ireland’s, especially as
we are now in the euro zone.
B1 (iii)
•
Two questions here:
• Examine critically the concept of competitiveness
• Why competitiveness matters so much for a small regional economy
like Ireland’s
B1 (iii)
•
Examine critically the concept of competitiveness
•
Narrow sense:
• Prices out of line, relative to others
•
Broader sense:
• Think of all the things that go into being competitive in any field:
B1 (iii)
•
Examine critically the concept of competitiveness
• The ‘right’ goods
• High quality products
• Selling at a competitive price
• Having reliable supply
• Marketing
• Amount and type of human capital in the country
• Infrastructure
• Legal, tax, patents, transport…
• High up the value-chain if you want to be a ‘rich’ country
• E.g. apple products
B1 (iii)
•
Why competitiveness matters so much for a small regional economy
like Ireland’s
•
NB issue for a regional economy as a policy instrument
•
Regional economy prices taken over the long-term - importers of price
•
If prices & productivity rise together it’s not an issue
•
Deviations (short-run) can cause damage – prices get out of line:
• With productive and less productive sectors wage pressure will raise
costs and prices
• Exchange rate and the amount of trade outside monetary system
can impact prices
B1 (iii)
• When prices/costs rise relatively you lose competitiveness
• i.e. exports more expensive and imports relatively cheaper (deficit)
• Borrow to finance deficit – which will need to be repaid
• With monetary policy you can devalue exchange rate for a sortterm solution
• But, raises domestic prices and pay claims
• Small economy & no Monetary Policy - can’t effect currency
• Rising prices and pay claims mean export sales fall and imports rise
• Lose export markets, growth and labor demand fall
• Painful mean reversion/internal devaluation and repayment!!!