Macroeconomic Objectives Flashcards
What are the macroeconomic goals of government?
Low employment (not zero?)
Sustainable level of government debt
Low and stable inflation
Economic growth
*Equity
Environment not included—market failure (negative externalities)
We could have all those things, but they’ll mean nothing for future generations if we don’t keep the environmental stuff in check. But it’s becoming more of the conversation (wasn’t a major objective that became part of all those economic objectives until recently).
Unemployment and difficulties in measuring
The existence of idle/underutilized resources (we generally use the term specifically in reference to the FOP of labor, so the people who are qualified to work and seeking work, but are without jobs)—not using something fully.
Unemployed/Underemployed = inside curve (goes for all resources).
“Discouraged workers,” underemployment (part-time workers [could do more]; people who were fired, but are on retraining programs; people who retired early, but would rather be working [maybe given some incentive?]) excluded.
How underutilized?
Official statistics may overestimate unemployment due to the parallel (?)/informal sector (no formal paperwork for ex. vendors, drivers, household help, maybe—and don’t know the exact # b/c informal [“don’t have proof”]), and national unemployment statistics do not account for regional differences (ex. different states).
Hard to keep track of everybody: there’s a lot of data out there, and figuring it out is tough (problem w/ unemployment figures). You’re not sending out surveys: you’re looking at it in a larger view. Unemployment benefits, tracked in system b/c actively seeking (on a monthly basis?). Could lie if wanted to make things look better or worse (so you get loans/aid [but trade, immigration, etc.—doesn’t want currency to appreciate?]). Some more anecdotal, others more data-driven. Not counted as unemployed if been doing it for a while and benefits going down and you’ve given up, no longer listed as unemployed (b/c no longer seeking).
Unemployment rate
Specific measure (unemployment rate rate, so dividing)
number unemployed (qualified and seeking [willing and able])/total labour force (those who are able to be in the work force)
Underemployment
People are in jobs in which they contribute less than they are capable of contributing. If you have a job (even if it’s way below what you’re qualified to have), you’re employed (even though you’re not using your skills to the extent that they can be).
Costs of unemployment (economic, personal + social)
Economic:
- Loss of income to the unemployed worker
- Loss of rGDP
- Loss of government revenue (income tax goes down??? [VAT? Buying less…])
- Increase in government expenditure (unemployment benefits—budget goes down)
- Costs to government of dealing with follow-on effects
Leading to…
- Government budget impacts
- Long term employment issues
- Increased income inequality and poverty
Personal + Social:
Personal
- Loss of confidence
- Psychological issues
- Drug, alcohol abuse
- Family issues
Social
- Increased crime as a perceived solution to poverty
- Loss of social cohesion
- Increased homelessness
Think of how it would affect you personally
Structural unemployment
Structure of economy has changed (ex. tech replacement—not making the same things…). Jobs replaced, new jobs introduced; some will be able to get new skills, others won’t (different skills [don’t match w/ what’s available in the economy]).
Caused by changes in demand for particular job skills, or changes in the geographic location of industries/jobs. Wrong skills.
Profession part of who you are?
In a bigger economy, may have the skills, but not in the right place (nobody lives there, nobody to do the jobs). At least a temporary structural gap. Helping people relocate, training…
We often use the term “labour rigidities,” meaning this FOP is not fully flexible or mobile (ex. minimum wage regulations, labour union activities, employment protection laws, generous unemployment benefits). Labor market not flexible enough to gain the skills, shift to where needed.
Fall in demand for labor means lower wages. Minimum wage is price floor (higher-than-equilibrium wages and lower qty of labor demanded). Rigidities lead to increase in COPs (supply shifts left, causing a fall in Q produced; employers hire fewer workers). Different for last, ofc…
Frictional unemployment
Workers between jobs (newly fired, seeking better jobs: assumed to be temporary and short-term [not due to lack of skills or suitability]). Often voluntarily, but not always. Skilled and suitable.
Can be a result of the lack of availability in the market (job websites, headhunters [?]).
Good for an economy. Moving to where they might be better valued. Govt not worried abt it: won’t do anything to make it go away. Usually not huge, and usually creating better productivity.
Seasonal unemployment
Demand for a particular type of labor varies based on the season/time of year.
ex. ski instructor (during summer), agriculture (don’t need people in between [to watch stuff grow])
Govt doesn’t really mind: knew it was coming, and it’s usually relatively small.
Cyclical (demand deficient) unemployment
Cyclical unemployment. Associated with downturns in the business cycle, tends to follow the shape of the business cycle curve but with a slight lag. More of a Keynesian concept (do from that weird curve bit) but can be seen in both diagrams (decrease in demand [demand deficient]).
Typically by decrease in demand, but can be a supply shock (??). Need fewer people to make fewer goods.
Govt cares and will try to do stuff abt it. Trying to pull structural, frictional (may speed up process, but not a huge change), seasonal (don’t need ski instructors during summer) into the force to increase output (high-cost way to do it)??
Total and natural/full unemployment
structural + seasonal + frictional + cyclical = total unemployment
structural + seasonal + frictional = natural/full employment
so, full employment = zero cyclical unemployment
Employment in monetarist view
At Y < YP: recessionary gap
unemployment > natural/full
natural/full + cyclical
Output less, need fewer people = below Yp
At Y = YP
unemployment = natural/full
structural + frictional + seasonal
At Y > YP: inflationary gap
unemployment < natural/full
as a portion of the natural unemployed group finds work (at higher cost)
Yfe (natural rate) is difficult to pin exactly b/c things are always changing (in the real world, can’t just ceteris paribus things).
Govt/National/Sovereign debt
The amount of money owed by a government to its creditors.
Arises from the fact that a government may not always have a balanced (? govt revenues = govt expenditures [in a period]) budget.
If expenditures > revenues, there is a budget deficit (govt will borrow money by issuing bonds, which are securities issued by the government and paid for by third parties, who in turn generally receive a promise to repay the money with a specified rate of interest: it is effectively a loan to the government)
If expenditures c Revenues, there is a budget surplus (can be used to pay down debt levels)
Govt debt as a % of GDP? Whether of concern depends on many factors, including who owns the debt, and the government’s perceived ability to repay (in short and long run).
Impacts of govt debt
Debt servicing costs -
Interest paid on debt, becomes part of expenditure, so opportunity cost (and who owns it matters)
Credit ratings -
If implicit/explicit credit rating indicates high risk, have to have higher interest rates to attract lenders (higher debt level, higher risk)—bonds rated by various private firms.
Future taxation + govt spending -
Debt must be paid through budget surpluses (either reduction in spending or increase in taxes)
Lower private investment -
If confidence in govt is reduced (+ crowding out effect)
Possibility of a debt trap -
More debt needed to pay back interest, higher risk leads to higher interest rates, leads to higher interest payments…
Lower economic growth impacts on AD (C,I, G components)
Increased income inequality??
Inflation
Sustained increase in the general price level of goods and services in an economy.
On average, prices are increasing, though not for all items at the same level.
Deflation + effects
Sustained decrease in the general price level of goods and services in an economy.
Causes: decrease in AD, increase in AS.
Quite uncommon, and generally more feared than inflation (even a little bit can be very damaging).
Rare due to wages being “sticky downward” and due to Oligopoly behavior.
More of a concern to central bankers than inflation (tougher psychology)
Don’t typically see it.
Usually, something big causes it.
W/ inflation close to zero, and something slows it, could very quickly lead to deflation.
Deflation b/c of AS is b/c productive possibilities bettered (so economists less worried abt this than abt AD).
Economy at least growing (more people probably employed, ceteris paribus)
W/ AD, economy has probably shrunk, so less employment.
Flip around winners and losers of other side (inflation)…
Winners: Those on fixed incomes or wages, lenders, savers/holders of cash.
Losers: Those paying fixed incomes or wages, borrowers (government).
Increase in real value of debt
Uncertainty
Deferred consumption, leading to a deflationary cycle (delay purchases b/c waiting for prices to go down: feeds into itself)
Risk of bankruptcy and financial crisis
Inefficient resource allocation (price signalling is distorted)
Ineffectiveness of government policy
Small upside: lower domestic prices (increase consumption of domestic goods, so there are fewer imports and more exports, increasing [X - M])
Govt policy for deflation is difficult
*Nominal GDP would go down b/c same amt produced, but at a lower price level
W/ rGDP, if caused by supply, increase, and if by deman
Disinflation
Decrease in the rate of inflation over a period of time (so, if inflation was 8% in Q1 and 7% in Q2, the economy experienced inflation, but also disinflation: prices continued to rise but at a slower rate).
Measuring inflation (CPI [+ issues])
In order to track inflation, we generally use a measure called the Consumer Price Index, or CPI. Tracks the price of a “basket of goods” over time, and so it tells us what is happening with general price levels.
Typically have a base year, where the CPI is 100, then an index for surrounding years which indicates the variation relative to that base.
See calcs…
Issues:
“Basket” does not represent all groups and wage levels
Different rates of inflation due to regional/cultural differences
The things people buy change over time (substitutes, tastes + preferences, tech, new products + services)
Changes in product quality (may need to buy less often if get better)
International comparisons
Comparability over time when the items in the basket change
Things that one party buys more of may have went up a lot in price, so inflation is worse for them…
If basket doesn’t change, not meaningful, so what changes the basket? What are people spending their money on? How can we compare something from years ago to something today?
Demand-pull and cost-push inflation
Two types of inflation
Demand-pull: Caused by an increase in AD (can be driven by any of the four contributing factors) when the economy is operating at/near full employment level of output.
Won’t have demand pull w/ Keynesian if resources still abundant (horizontal part).
Cost-push: Caused by a fall in AS (usually as the result of increased costs of wages or of other FOPs: higher costs push supply to left).
Costs of inflation
Will move things around: there’ll be winners and losers.
Impact on real income/purchasing power (loss of purchasing power is when prices go up, and now you can’t get as much of the product w/ the same amt of money)
Redistributive effects (negative impact on those w/ fixed income [senior citizens, government support], wages that increase more slowly than inflation [often, minimum wage], cash/other assets that don’t increase in value [savers], landlord of fixed price housing, lenders).
Positive impact on borrowers, payers of fixed income/wages, renter of fixed price housing.
Uncertainty (can lead to either accelerated or decelerated spending, both of which can have negative effects)
Impacts on saving (reduced savings reduces funds for lending)
Impacts on economic growth (uncertainty reduces investment)
Impacts on export competitiveness (higher inflation increases the costs of exports [so export levels])
Impacts on resource allocation (signalling mechanism of prices becomes less clear, increasing allocative inefficiency)
Social and personal costs that are unequally distributed (inflation generally regressive: more significantly impacts low income people [redistributes income in a bad way])
Some govts have it pegged w/ inflation (income increases w/ inflation): govt tries to keep buying power steady
Positive for payers when fixed b/c giving out less???
Fixed percentages (maybe a house or student loans)? Are wages going up?
Long-term contract you have w/ the bank: gamble that the bank has taken (they understand and are willing to take that risk)
Businesses can’t invest as easily b/c less saved?
Hyperinflation
When inflation exceeds 50% per month
Consumers spend immediately (AD up/demand-pull), workers demand higher wages (AS down/cost-push), sellers hold back supply (but not worth the same amt, so just really confusing) , businesses don’t invest, creditors lose out, banking system collapses—a vicious cycle.
Negative effects of deflation
Economic growth
Increase in the real output of a country in a period of time. Often expressed in terms of a growth rate of real GDP or real GDP per capita (we’ll just use GDP for now, and not the other indices). Percent change in GDP from one year/quarter to another.
Causes of short- and long-run actual growth
Short-run:
An increase in AD (no impact to long run potential output) and, less common/important, an increase in short run AS (driven by reduced cost of an FOP [if temporary, no impact to long run potential output]).
Corresponds to the expansion phase of the business cycle (movement from inside the PPC to a point closer to on the PPC [reduction in unemployment, improvement in efficiency]).
Long-run:
An increase in long run AS (long run potential growth).
Corresponds to the increasing trendline of the long-term potential in the business cycle (an outward shift in the PPC [improvements in efficiency, institutional changes])—increased resource qty, improved resource qlty, technological change.
Factors that contribute to long-term growth
Physical capital -
Investments in productive capacity in the form of physical assets (increased qty [more of the same], quality [better machine b/c of new tech]: both are sources of long-term growth).
Human capital -
Skills, abilities, knowledge, health of workers in an economy. Increased qty of labor may impact short term growth, but is unlikely to significantly impact long-term growth. Increased skills of labor take longer to see the impact, but are much more likely to result in the long-term growth of an economy.
Investments in human capital are a critical component of long-term growth.
Natural capital -
Marketable commodities (coal, oil, gas, minerals, timber, fish). Harder to create (may find more). Can contribute to growth, but are NOT required.
Ecological commodities (clean air, clean rivers + oceans, stable climate, biodiversity, sustainable fisheries, the ozone layer [generally, common pool resources]). These are essential to long-term growth.
Productivity -
Output produced per unit (hour) of work expended (GDP/# of hours worked). Increased productivity can lead to increased long-term output, since more can now be made by the existing workforce. However, if productivity leads to a comparable loss of jobs, long run growth is not achieved. Technology helps our productivity b/c we can do stuff faster, but it has a flip-side (jobs taken away from people).
Impacts of growth on living standards
Overall growth provides some benefits to everyone, but growth itself is not a guarantee.
Has a bigger impact on increasing living standards when: distribution of income is more even, consumers spend more of incremental income (MPC), more of income is controlled by women, govt use increased revenues on merit goods, NGOs play a positive role in target areas of improvement.
You would think living standards and income distribution would be bettered, but depends on where the gro
More tax revenue, employment, but doesn’t automatically mean
Improvement positively impacts.
Impacts of growth on the environment
Ceteris paribus, environment worse (making more stuff = consuming more resources). Growth, especially when rapid, often leads to unsustainable resource depletion (use of resources for growth, but also for the follow on demands that come from income growth).
Looking forward, it is not growth itself, but how the growth is achieved, which will be critical for sustainable growth.
Key factors for sustainable growth: govt policies which “internalize the externalities,” regulations that encourage low pollution/pollution free technologies, increased emphasis on human capital vs. physical capital, increased emphasis on green investments (public transport, energy savings), shift toward services + investments to protect natural resources.
Improvement positively impacts.
Impacts of growth on income distribution
This topic has been studied extensively with limited success, however, some key observations can be made about actions that worsen income distribution in developing countries: investments in labor-saving technologies and low government investment in human capital.
Improvement positively impacts.
Conflict between macro objectives
Low Unemployment and Low Inflation
Inverse?
Increase of 1% in unemployment lowers well-being almost six times as much as a 1% increase in inflation
High Economic Growth and Low Inflation
Demand-pull (Keynesian [can achieve growth w/o inflation in the elastic section of the AS curve], Monetarist [growth must bring inflation]—only way to avoid inflation with growth in the LR for both is to increase LRAS)
Cost-push (left shift of SRAS leads to “stagflation”; inflation with low or negative growth)
High Economic Growth and Environmental Sustainability
High Economic Growth and Equity in Income Distribution
Equity and equality
Equity - fairness in terms of access, a normative term (different people have different views)
Economic equality - when people have achieved the same economic condition or standard of living
Equality - the same result, a positive term (it can be measured and proven)
People often use these terms interchangeably. It is not really correct to do so, but in economics it is permitted IF you define each and indicate that economic inequality indicates a lack of fairness and is a proxy for inequity.
Equity and equality
Equity - fairness in terms of access, a normative term (different people have different views)
Equality - the same result, a positive term (it can be measured and proven)
Access and same result?
People often use these terms interchangeably. It is not really correct to do so, but in economics it is permitted IF you define each and indicate that economic inequality indicates a lack of fairness and is a proxy for inequity.
Economic equality and inequality
Economic equality - when people have achieved the same economic condition or standard of living.
Income Inequality - difference in income earned by members of a population over a period of time. Income includes all sources; job earnings, benefits, government payments, interest and dividends, rent on properties owned.
Wealth Inequality - different members of the population have different levels of ownership of assets; cars, houses, stocks, bonds, etc.
Wealth is abt assets (what you already own/have already acquired)
Can generate income
Income is what your bring in in a time period
Measuring inequality
The Lorenz Curve is a graphical representation of income inequality.
Based on data of quintiles (fifths [income groups]) of a population and what share of total income the receive (ex. lowest 20% makes however much % of total income).
The diagonal line (45º) is perfect income equality (everyone has the same income)
The further down and right the curve for a country goes, the less income equality.
Gini coefficient is numerical representation of Lorenz curve (go hand-in-hand [if you have one, have the other])
B/c might get messy if you had a lot of Lorenz curves
Out of area of triangle (A + B), A (curve)
Lower = better for Gini coefficient, b/c closer to perfect equality line
Index is coefficient x 100
0 to 1 vs 1 to 100
Wealth inequality
Wealth inequality typically worse (value would be higher)
For emerging, wealth hasn’t accumulated (you’re living day-to-day [not buying: renting]: don’t have extra money to invest in stuff), so gap for emerging markets not as bad
But builds and gets worse over time
Assets earning you more if richer, so wealth inequality growing faster than income inequality
With low wages, low and medium income households have less disposable income to save and invest
Those with higher wealth and incomes have access and knowledge of higher return investments
Income poverty
The common measure where income is compared to a defined poverty line
Relative poverty - the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live (50% less than average/median household income [sometimes based on disposable income, sometimes absolute])
Absolute poverty - people lack access to basic needs such as clothing, food and shelter. This is set at around $1.90 PPP per day internationally, but this figure is debated, and countries may set their own level.
Human poverty
Deprivations and lack of opportunities that allow individuals to lead a long, healthy, creative life and to enjoy a decent standard of living, freedom, dignity, self-esteem and the respect of others.
Multidimensional Poverty Index (MPI)
A composite measure of poverty that includes indicators of health, education and living standards.
Similar to…?
Challenges measuring poverty
Poverty has different meaning and ways to measure (absolute [some countries define differently], relative, PPP, income based, deprivation based)
May think standard isn’t appropriate
Income-based measures ignore the role of wealth (most numeric measures for poverty based on income)
Reliable data from poor areas is hard to get
Earnings from informal economic activity are harder to measure and verify
Barter may represent a higher percentage of economic activity
Regional differences in cost of living are not reflected in national calculations
It’s often hard to survey the very poor such as homeless people
The figures give us an amount, but not necessarily a degree of poverty
Some governments may wish to either exaggerate (for aid, loans) or underestimate poverty
Causes of inequality
Inequality of opportunity (“lottery of birth”—parents, place, gender, race and ethnicity)
What do you do w/ your lottery? If you don’t get an education, may work your way down (children may be less fortunate, their children may be less fortunate, etc.), but opposite also true…
Different levels of resource ownership (related to opportunity and “rich get richer”)
Different levels of human capital (education and skills)
Discrimination (race, gender, caste, others—can impact education, hiring and promotion [the “glass ceiling”]), preference for “like people”)
Unequal status and power (those w/ power can influence events to their own benefit [politicians and those who support them])
Govt tax + benefits policies (value and types of benefits/transfer payments, progressive/regressive tax structures [govt policy can cause or help inequality])
Technological change (automation of repetitive tasks, new skill needs in engineering/computers/coding, loss of unskilled jobs and ship of benefits to owners of capital)
Globalization (process accentuates tech change, significant shift to globalization in the last several decades)
Political sovereignty at risk when dependent on other country
Cheaper not everything
Trying to increase domestic production will increase costs and standard of living
Market-based supply-side policies (can include reductions in minimum wage, weakening of unions and labor laws)
Impacts of income and wealth inequality
Makes sense that high income inequality would mean higher levels of poverty
Higher inequality hurts economic growth
Reduces ability of lower income households to invest in human capital
Generally related to lower level of education in the lower income group
Higher income people have lower spend as % of income, but their savings are often invested abroad
Concentration of wealth can lead to actions to defend that condition which are not beneficial for overall economic growth
Poor can’t obtain credit to help them escape poverty
Low living standards (economic well-being): lack of access to healthcare + education, higher infant + child + maternal mortality rates, higher levels of preventable diseases, social problems (crime, drugs, family issues), inability to realize one’s full potential
Social stability
Large groups w/o opportunity and hope combined with small groups that are in control and favor themselves is a recipe for trouble
Lower income households not able to invest in themselves (poverty cycle)
Hurts growth (output can’t improve if can’t invest in themselves)
Marginal propensity to consume (if you get an extra dollar, how are you going to spend it) goes down as income goes up (they save)
If the rich are spending less, creates fewer jobs for people
The actions to consolidate power and wealth not the same to consolidate an economy (?)
People who are unhappy w/ their situation are probably only going to take it for so long
Policies to reduce inequality and poverty (types of taxes)
Direct:
Personal income taxes
Corporate income taxes
Wealth taxes
Social insurance or payroll taxes
Indirect:
General sales taxes or VATs—sometimes certain goods are exempted or have lower rates (basic foods, all foods, below certain level of income)
Excise taxes
Customs duties/tariffs
Taxing people that make a lot of money and redistributing to the poorer population is an oppty
Indirect taxes regressive
Don’t have extra money to pay that tax, will have to buy less food
Unless something done to make them less so
Proportional - as income rises, the proportion of income paid in taxes stays constant
Regressive - as income rises, the proportion of income paid in taxes decreases
Progressive - as income rises, the proportion of income paid in taxes increases
Marginal tax rate = mildly progressiv
Indirect taxes on goods that only the rich buy are not regressive (certain homes, luxury goods, etc.)
