TOPIC 2 - Main types of unbalances in the world economy Flashcards

1
Q

What leads to growth in GDP

A
  • Increase the percentage of the population that performs productive activities (or per capita employment rate)
  • Increase in labor productivity
  • Or an increase in both at the same time
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2
Q

GDP growth - Short run

A

Both growth paths are perfectly compatible

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3
Q

GDP growth - Long run

A

Can only be obtained through an increase in labor productivity

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4
Q

Aggregated productivity function

A

How much output is produced for a given quantity of inputs

Y = AK^α × L^β

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5
Q

Define variables of Aggregated productivity function

A

Y = output
A = total factor productivity (efficiency)
K = physical capital
L = labour
α = elasticity of capital
β = elasticity of labor

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6
Q

Aggregated productivity function per worker and in growth terms

A

Y/L = A (K/L)^α
=> y = Â + αK

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7
Q

Growth in the Neo-classical growth model

A

Increase in labor productivity due to:
- Intensification of capital
↳ Increases in capital per worker
- Technological progress (exogenous)
↳Increase total productivity factors

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8
Q

Reasons for the productivity gap EU & US

A
  1. Lower market flexibility
  2. Innovation and adaption
  3. Human capital
  4. EU single market
  5. Financial sector capacity
  6. Business enviorment
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9
Q

Balance of payments

A

All types of economic transactions between residents and non-residents during a specific time period

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10
Q

Current account

A

Exports = Imports (goods/services)

Income received by residents for labor and capital used by non-residents = Payment made by residents for using labor and capital of non-residents

Current transfers from non-residents to residents = Current transfers from residents to non-residents

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11
Q

Capital account

A

Capital transfers and assets moving in and out of the country or region are equal.

Capital outflows = Capital inflows

(Capital transfers from non-residents to residents & income from non-produced & non-financial assets = Capital transfers from residents to non-residents & and payments for non-produced & non-financial assets)

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12
Q

Financial account

A

Net change of assets (NCA) = Net change of liabilities (NCL)

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13
Q

NCA

A

Residents’ purchases of non-residents’ assets

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14
Q

NCL

A

Net change of liabilities -> Non-residents’ purchases of residents’ assets

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15
Q

NCA - NCL > 0
(NCA>NCL)

A

Invest in the RW more than the RW invest in our country. Hence there is a capital outflow implying that we are creditors.

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16
Q

NCA - NCL < 0
(NCA<NCL)

A

The RW invests in our country more than we invest in the RW. Hence there is a capital inflow, implying that we are debitors

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17
Q

Account surplus

A

Income > Payments
Capital inflows < Captial outflows
NCA - NCL > 0 (NCA>NCL)

Implies that has external financing capacity for the RW (we are creditors), thus we finance the RW

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18
Q

Account deficit

A

Income < Payments
Capital inflows > Captial outflows
NCA - NCL < 0

Implies that we need the RW to finance us (we are debitors), hence we go into debt to the RW

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19
Q

Account unbalances

A

Income ≠ Payments
Capital inflows ≠ Captial outflows
NCA - NCL ≠ 0

A country account is in a deficit or a surplus

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20
Q

Non-residents

A

Individuals or entities that do not reside (live) in a certain country or region

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21
Q

Residents

A

Individuals or entities that do reside in that country or region

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22
Q

Absorption approach
Proposal 1 - Equilibrium

A

Y - A = X - M

Supply = Demand
↳ no pressure on prices
Imports = Exports
↳ no imbalance in current account

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23
Q

Absorption approach
Proposal 1 - Open economy function

A

Y + M = C + I + G + X
where A = C + I + G

24
Q

Absorption approach
Proposal 1 - Variables meaning

A

Y = production
M = import
C = consumption
I = investments
G = government spending
A = internal/domestic absorption
X = exports

25
Absorption approach Proposal 1 - Current account deficit
Y < A ⇒ X < M Caused by excess internal absorption compared to the disposable income
26
Absorption approach Proposal 1 - Current account surplus
Y > A ⇒ X > M Caused by a lower internal absorption compared to the disposable income
27
Absorption approach Proposal 2 - Equilibrium
S - I = X - M Savings = Investment Imports = Exports ↳ no imbalance in current account
28
Absorption approach Proposal 2 - Open economy function
Y + M = C + I + G + X where S = Y - C - G
29
Absorption approach Proposal 2 - Variables meaning
Y = output M = imports C = consumption I = investment G = government spending X = export S = savings (domestic)
30
Absorption approach Proposal 2 - Current account deficit
S < I ⇒ X < M Due to excess internal expenditure on disposable income, hence the country must obtain financing from the RW
31
Absorption approach Proposal 2 - Current account surplus
S > I ⇒ X > M Due to domestic demand being lower than disposable income, hence the country has capacity of financing the RW
32
Negative sides of being in a deficit
The country face increasing debt, which makes them sensitive to financial crisis and debt crisis
33
Negative sides of being in a surplus
It makes the country rely on the RW for economic growth
34
What is optimal deficit or surplus
The optimal is to alternate between deficit and surplus → when accumulating debt they can pay it off later, visa versa.
35
The objective of policymakers
Y - A = S - I = X - M To obatin euqilibirum → current account balance
36
How can the objective of policymakers be obtained
- Fiscal policy - Monetary policy - Exchange rate policy
37
Fiscal account balance
Revenues = Expenditures
38
Fiscal account surplus
Revenues > Expenditures
39
Fiscal account deficit
Revenues < Expenditures ↳ obtain debt
40
What does the fiscal revenues and expenditures consist of
Revenues: - Taxes Expenditures: - Government spending on good/services - Transfers - Payments on debts
41
Primary balance
Fiscal balance excluding net-interest payments on public debt ↳ Indicator of short-run sustainability
42
To obtain fiscal balance the government can implement
- Automatic stabilizers ↳ Economic policies and programs (welfare, unemployment, etc.) - Discretionary policies ↳ Government spending or taxes
43
Structural balance
The fiscal balance a government would have with its current policies if the economy operates at its full potential (potential GDP -> no output gap)
44
Fiscal debt sustainability
Sustainable implies that the government debt can be paid by the government
45
Rational behind negative correlation betweeen growth and debt (3)
An increase in debt: - Increse the interest payments ↳implies a cut in expenses and/or increase in taxes - A drop in investments - Loss of margin to practice countercyclical policies
46
Burden for growth
When a country is in a deficit and has a debt, it must increase revenues or reduce expenditures to obtain growth.
47
Issuance of debt
To make up for the deficit the government can borrow money by issuing debt. ↳ loans by investors to government in exchange for interest payments
48
Debt function
Differentiate the deficit from current and past fiscal policy B_t = D_t + B_(t-1) ⇒ B_t = DP_t + (1+r_t) B_(t-1)
49
Debt function variables meaning
B_t = total debt period t D_t = public deficit t DP_t = primary deficit in t B_(t-1) = debt generated in period t-1 r_t = nominal interest rate (r= π + ρ) (1+r_t) B_(t-1) = interest payment on public debt from previous period g = GDP
50
Debt function in GDP terms
b_t - b_(t-1) = dp_t + (r_t -g_t)b_t-1
51
When is the debt function sustainable?
Debt is sustainable if the debt in t is less /equal to the level of debt in t-1 b_t - b_(t-1) ≤ 0 ⇒ dp_t + (r_t - g-t) b_(t-1) ≤ 0
52
When is the debt function not sustainable?
Debt is sustainable if the debt in t is higher than the level of debt in t-1 b_t - b_(t-1) > 0 ⇒ - dp_t ≥ (r_t - g-t) b_(t-1)
53
Conditions for a sustainable path - debt function
- If (r_t - g_t) b_t-1 = 0 then dp_t ≤ 0 - If g_t ≥ r_t then dp_t ≤ 0 ↳ △GDP + π ≥ ρ + πê
54
Conditions for an unsustainable path - debt function
- If g_t < r_t and dp_t > 0
55
Conditions for an unknown path - debt function
- g_t ≥ r_t but dp_t > 0 - dp_t ≤ 0 but g_t < r_t To determine if this path is sustainable or not we need to do calculations
56
Measures to reduce fiscal unbalance and public debt
- Ensure economic growth (g>r & dp<0) - Unexpected inflation (g>r) - Financial repression - Fiscal adjustments (dp<0) - Sell public assets - Restructuring or non-payment