Macro Theorists Flashcards
Fishers quantity theory of money
- Increase in injections into the economy
- Increases money supply as more £ is flowing around the circular flow of income
- Increases P.L = more people chasing the same number of G+S
- leading to inflation
MV=PT
Fishers quantity theory of money equation
MV=PT
M- quantity of money
V- velocity of circulation
P= price level
T- volume of transactions
Easterlin Paradox
At low Y’s, when national incomes rise, happiness rises. Above a certain average income, growth in Y doesnt lead to greater levels of happiness
Harrod Domers saving equation
- Savings/ capital output ratio
- When a firm saves, they have more £ to invest
- Increase in investment allows more firms to invest in growth and development
Solow’s growth model
- Economic measure of output
- It assumes that labour and capital is fixed
- The factors are population rate, savings and technological advances
Describe Marshall- Lerner condition
PEDx + PEDm >1
PED for net exports is greater than 1: CA deficit will be resolved= surplus
What is the Marshall- Lerner condition
A currency depreciation will only correct a current account deficit if
* Demand for X increases= increase revenue generated by them
* Demand for M falls= decreases expenditure spend on them
PEDx + PEDm >1
What is the J-curve effect
A depreciation (WIDEC) : demand for imports and exports are inelastic
Takes time to adjust to the fact that imports are more expensive (takes time to adjust to changes in E.R.)
Net exports demand is inelastic in short run so current account deficit will worsen before improving
According to the J-curve affect, why would the CA deficit improve in the long run
FoP are more varied and change
(heavy dependency)
Pre Bisch- Singer hypothesis
In the LR, P’s of primary G/S (natural resources) declines in proportion to manufactured G/S
Those dependent on primary X will see a decline in their ToT
X must increase to fund same quantity of M
Advice: Use X revenues to promote diversification
Ohlin Heckshler
The factor abundance model
Countries export the factor they have a lot of
Gravity model
Countries near each other should trade with one another
David Ricardo
Comparative advantage
A country should specialise in a G/S it can produce at the lowest opportunity costs, and then trade with another country
Paul Krugman said…
The ability of a country to produce a particular product at a lower opportunity cost than its trading partners, is due to different natural resources and other factors
Vertical specialisation
Country that imported intermediate parts to create a G/S it later exports
Dutch disease
Success in specialisation increases the E.R. making other sectors less internationally competitive.
But E.R. always fluctuate through automatic adjustments
Keynesian consumption function formula.
C= a + bYd
Explain keynsian consumption function
At low incomes, people will spend a higher proportion of their income beacuse they have less to save (spend more on necessities)
As incomes rise, people can afford the luxury of saving a higher proportion of their income
Spending ↑ at a lower rate than disposable income
High incomes= low APC
Milton Friedman
Permanant income hypothesis/ Rational expectation theory
People consume based on their future predicted income
* If income tax decreases, consumption wouldnt ↑ as a result of people knowing that its temporary and will rise again
* A persons assets determine their permanant income eg wealth
Equation for permanent income hypothesis
C=KyP
K= constant average and MPC
P= permanent income
Life cycle hypothesis
At low incomes people have ↑ MPC
High incomes = ↑MPS
older people save more as they have their peak income
What is debt jubilee
- ‘Jubilee’ – biblical practice of a year of rest and forgiveness of debt that was held every 50 years. I
- In modern era, idea of debt jubilee has been proposed as a solution to the problem of unsustainable levels of debt, particularly in low-income countries.
- By forgiving all debts, a country can reset its economy and start afresh
What is Piketty’s argument in the ‘Capital in the 21st centrury’
- The ratio of wealth to income is growing in all developed countries
- Absent extraordinary interventions, we should expect that trend to continue
- If it continues, the future will look like the 19th century, where economic elites have predominantly inherited the wealth rather than working for it
- The best solution would be a globally coordinated tax wealth
Macro policies in a global context
Principles of Keynsianism
- In favour of expansionary fiscal policy
- In a recession/ liquidity trap, the govt can increase AD + real output through govt borrowing and increase in govt spending
- Stress the importance of decreasing unemployment rather than inflation
Keynsianism
Paradox of the Thrift
‘Glut’ of savings
In a recession, people resonded to the threat of unemployment by increasing savings and decreasing their spending, which is rational but results in an even greater decrease in AD and GDP. So govt intervention is needed.
Macro policies in a global context
Why does Keynesianism reject crowding out
Crowding out is presented by Monetarists
Argue is there is an increase in private sector saving (and decrease in spending), govt can offset this decline in private sector spending. This can result in crowding in.
Keynsianism
Explain sticky wage rates
Keynsianism believe there is a degree of wage rigidty. In a recession, Keynes said wages might be ‘sticky downwards’ as union resists nominal wage cuts, which lead to real wage unemployment.
Monetarism principles
- Critical of the ability of fiscal policy
- Believe wages are moe flexible and more likely to adjust downwards to prevent real wage unemployment
- Stress the importance of contrlling the M.S. to keep inflation low
- Place an emphasis on decreasing inflation than low unemployment. Monetary policy should be used to support price stability.
Absence of property rights
Hernandes De soto
- Lack of property rights such as ability to own land and knowledge through patents affect the ability of economic agents in developing economies to earn income
- ‘Dead capital’ are assets that cannot be legally bought, sold, valued or used as investment
Douglas North: Quality of institutions affect development
Markets supporting institutions (like law and banking) are important and helped technological progress through property rights and development of capital markets, create incentive for saving, investment and innovation, allowing growth and development
Hidalgo’s complexity theory
More complex a country’s output, the more resilient it is for sustainable growth against external shocks.
Use for industrialisation or developing tourism and service sector through diversfiying the economy
Its the cumulaive amount of knowldge that is important for overall development
BUT depends of factor mobility and labour supply skills
Lewis Model of industrialisation
Labour can be transferred from traditional sector i.e. agriculture to modern manufacturing sector to bring growth and development
E.g. mass migration to China from rural area to cities but they went through reindustrilisation (state sector to private sector industry)
This is because there is an abundance/ infinite supply of low-cost labour in developing economies
Define capital output ratio
The ratio of total capital stock to total output (usually measured as GDP) of an economy
What is the Lewis turning point
- In a traditional agriculture economy, labour is abundant, and wages are low because workers are not highly skilled
- As industrialisation begin, labour is gradually drawn from the agriculture sector to modern industrial sector, leading to a shortage of labour in agriculture and increase in wages
- At the Lewis TP, the supply of labour from agriculture becomes limited and wages in farming begin to rise.
- This increase in wages= higher CoP in agriculture, increases prices of agriculture G/S
- Modern industrial sector become more competitive as it can produce G/S as a lower cost that the agriculture sector.
Why is moving beyond the Lewis TP not a guarantee of economic development
Countries must have appropriate policies and institutions in place to support industrialization and ensure the benefits of economic growth are distributed equitably. They must also address environmental and social sustainability issues associated with industrialization and rapid urbanisation.
Define primary product dependency
- The reliance of an economy on the export of primary products (e.g. raw materials) for income and economic activity.
- These products include natural resources like minerals, agricultural products, and oil.
Why would overdependency on copper result in declining terms of trade
The Prebisch Singer hypothesis states primary products will increase in price less than other products ovetime due to having a more inelastic YED. This is because when incomes rise, we buy more finished (manufactured) products more rather than primary products. Therefore, consumers will be able to import comparatively less than they could have meaning their S.O.L is likely to fall as they can access as many G/S as they previously did.
Dambisa Moyo
Poor countries become over-dependent on AID and cannot efficiently distribute the aid across the country. It also encourages corruption of hierarchy.
Douglas North
Less developing economies have financial institutions which means that there is less availability to borrow or save. It also restricts borrowing because poor countries cannot provide collateral to secure loans
Harrod Domers savings equation
Savings/Capital output ratio
When a firm saves, they have more money to invest. This increase in investment allows more firms to invest in growth and development
The malthus theory of population
The theory of exponential population may eventually exceed food supply
ROSTOWs model of development
This shows the development of an economy from the exploitation of PPD and then industrialising and exploiting the manufacturing sector in the long-run
The resource curse
When a country specialises in the overproduction of the resource it has a factor abundance in which could cause other industries to suffer
De soto’s property rights
This states that poorer, undeveloped economies cannot benefit from property rights and therefore their assets are not legally protected. This means that their assets are dead capital
Mundell flemings optimal currency area
This is the maximisation of economic efficiency between countries.
This is based of:
- Integrated labour market
- Flexibility of wages
- Redistribution of wealth
- Similar business cycles
Ohlin Heckshlers factor abundance model
Specialising in the trade of what they have a high resource of.
They can have a comparative advantage in this and benefit from economies of scale
Ha joon chang
Countries should use protectionism to develop
Krugmans new trade theory
The ability of a country to produce a particular product at a lower opportunity cost than its trading partners, due to different natural resources and other factors.
Gary Becker’s human capital theory
This stated that the government should invest in education to improve the skills of labour and increase productivity. This will help to develop an economy.
The government should fund research and development and fund childhood education.
- Technological advancements means that the knowledge that people acquire in school is becoming obsolete more quickly than before
Paul Krugmans gravity model
This states that countries near each other should trade with one another
Wagners law
What is an EV?
This is that public sector goods are income elastic and so when national income increases, so does public expenditure on healthcare and education etc
- some goods are inferior goods like public transport
What is Pareto efficiency?
Due to perfect competition, being in a competitive market means that a firm is fully maximising efficiency and nothing can be changed without making someone worse off
Tragedy of the commons
This is that when a common good is found, it will become over-utilised. This means that there will eventually be a depletion of resources
The Diderot Effect
Dictates that once you acquire something new, it will trigger a chain reaction that pushes you to start making more purchases.
What is Ricardian equivalence?
An attempt to stimulate the economy with government spent that is debt-financed will not benefit an economy because firms and consumers understand that this will lead to higher taxes in the future
Baulmol’s cost disease
When higher productivity increases demand for labour, this increases wages not just in productive firms but even the less productive firms have to offer high wages.
As these higher wages are not matched by high producivity, this increases costs
