EC 313 Intermediate Macroeconomic Theory

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EC 313 Intermediate Macroeconomic Theory

• Christina Steiger

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Today

• Syllabus
• Topics of current interest
• United States
• European Union
• Japan
• China

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Contact information

• Instructor Christina Steiger
• Email lsteiger_at_uoregon.edu
• Office PLC 419, 346-4666
• Office hours U 330-5, H 930-11
• Grader Eric Gaus
• Email egaus_at_uoregon.edu
• Office PLC 504

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Grading

• Final grade based on
• 5 homework assignments 25
• Class essay 10
• Midterm 25
• Final exam 40

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Outline of course

• Introduction
• Current topics in Macro
• Macroeconomic variables
• Keynesian model
• Aggregate Supply/Aggregate Demand
• Another look at unemployment, inflation and
  output growth
• Expectations
• Monetary and fiscal policy

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Key variables

• Output aggregate level of production of the
  economy.
• Output growth rate of growth of production.
• Labor force contains individuals who are either
  currently employed or actively seeking
  employment.
• Unemployment rate proportion of labor force who
  are unemployed.
• Inflation rate rate at which the average price
  of goods in the economy is increasing over time.

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U.S. economy 1994-2000

• The average rate of growth was 3.9 per year.
• The average unemployment rate was 4.9 per year
• The average inflation rate was 1.8

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Economic intuition of 1990s The New Economy
Figure 1 - 2
Rate of Growth of Output per Worker in the United
States Since 1960.
The average rate of growth of output per worker
decreased in the mid 1970s. It appears to have
increased again since the mid 1990s.
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Recession of 2001

• Sharp decline in output growth, with negative
  values in three out of four quarters.
• Policy response
• Fed sharply cut interest rates.
• Bush administration proposed sharp tax cuts, to
  stimulate household spending
• Recovery
• Increase in household consumption, in response to
  lower interest rates and taxes, leading to output
  growth.
• Unemployment continued to increase until 2003,
  but has decreased over the last two years
  jobless recovery

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Ever-expanding Budget Deficit

• The U.S. Budget Deficit, Since 1990 (Ratio to
  Output, in percent).

The U.S. budget has gone from large deficits in
the early 1990s to surpluses in the late 1990s,
and back to increasing deficits since 2001.
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Current Account Deficit in the U.S.

• Transactions with the rest of the world
• Exports and Imports (trade in goods and services)
• Investment income paid and received from the rest
  of the world
• Foreign aid
• Current account deficit is the net balance of
  these transactions, and represents the amount the
  U.S. has had to borrow from the rest of the
  world.
• Primarily driven by trade deficits imports
  exceeded exports in 2003 by 490 billion, or 4.9
  of GDP.

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Cause of trade deficit/current account deficit

• Since 1996, U.S. has grown faster than the world
  economy, primarily because of increasing domestic
  consumption and investment increasing trade
  deficit.
• Foreign countries willing to lend to the U.S.
  East Asian economies that tend to have high
  savings rates.

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The European Union, 2003
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• Two issues dominate the agenda of European
  macroeconomists
• High unemployment
• Appropriate monetary policy under common currency

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The European Union 1994-2000

• Less impressive performance than that of U.S.
  over same period
• Average annual output growth 2.3, vs. 3.9.
• Low output growth has been accompanied by
  persistently high unemployment
• However, persistently low inflation 2, similar
  to U.S.

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History of European Unemployment from miracle
to disaster

• Unemployment Rates Europe versus the United
  States since 1960

The European unemployment rate has gone from
being much lower than that of the United States
to being much higher.
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Recent performance

• Persistently low output growth, high
  unemployment. Why?
• Role of Labor Market Rigidities
• Stability and growth pact in EU
• Goal to maintain common fiscal policy, especially
  by reducing budget deficits
• Forced governments to raise taxes even during
  recession.

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Monetary policy in the EU

• European Central Bank often a convenient
  scapegoat for feeble growth in the EU
• Difficulty of monetary policy in EU
• Inflation is sticky in the euro area because of
  lack of competition.
• Harder for ECB to affect European economy.
  (e.g. less developed mortgage markets)
• How effective is a single currency/monetary
  policy?

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Japan
Japan 2003
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Japanese miracle Since 1960, Japans output has
grown at an average annual growth rate of 4.7,
1.5 higher than growth of U.S. over same period.
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Japanese slump

• Average annual growth rate of output from
  1994-2000 only 1.4.
• The unemployment rate steadily increased.
• Inflation rate decreased and eventually turned
  negative Deflation.

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Causes of the slump?
The Japanese Stock Market Index since 1980
The large increase in the index in the second
half of the 1980s was followed by an equally
sharp decline in the early 1990s.
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What caused the movement in the stock index?

• In general, two sources of movement in stock
  prices
• Fundamentals real factors which lead investors
  to expect higher future profits/dividends, and
  make them more willing to pay higher stock
  prices.
• Speculative bubbles investors buy stocks based
  on expected future increases in stock prices

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Japanese policy and the recovery

• Both fiscal and monetary policy used to help
  hasten recovery
• Increased spending on public works (e.g. roads,
  bridges, etc.) and cut taxes to stimulate
  spending by households.
• Central bank reduced interest rates to very low
  levels.

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Structural problems in Japan Banking System

• Sharp decline in growth in 1990s caused many
  firms to be unable to repay loans.
• Banks hid these losses by lending more to the
  same firms. Other firms unable to get loans.
• More recently, reforms have been implemented, to
  slowly eliminate bad loans.

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Stages of recovery

• 1st stage rapid export growth which boosted
  industrial production, profits.
• 2nd stage recovery in domestic demand
• Firm level investment in capital, job growth.
• Growth in personal consumption.
• Current difficulties
• Gross public debts exceeding 150 of GDP
• Needed reforms to allow growth to continue.

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Emerging economies East Asia

• Industrialized countries Singapore, South
  Korea, Taiwan.
• Currently experiencing rapid growth China and
  India
• Chinese phenomenon major contributor to world
  economic growth, even though standard living is
  still well below U.S.

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• Note Unemployment statistics for China are
  notoriously flawed and inconsistent.

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Transition to a market economy

• Market reforms introduced in early 1980s, 1/3 of
  economy currently state-controlled.
• Average growth rates have been higher than those
  achieved by any other Asian country during rapid
  development.

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Export-driven economy?

• Exports account for 37 of GDP is Chinas
  growth driven by cheap consumer goods for U.S.
  and Europe?
• Imports 30 of GDP processing factories
  that assemble products manufactured elsewhere.

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Future of China

• Chinas contribution to global GDP growth since
  2000
• Greater than Americas contribution
• More than half as big again as the combined
  contribution of India, Brazil and Russia.
• Strengths of economy healthy government
  finances, high savings rates
• Weakness need to boost personal consumption to
  sustain growth

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Next time

• Macroeconomic variables and their measurement
• GDP, GDP growth rate
• Price level measures, inflation
• Unemployment