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Ec 111 week 1(1)


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Ec 111 week 1(1)

  1. 1. EC-111: British EconomyRecent Macro EconomicPolicy and TrendsDr Catherine RobinsonF35, Richard PriceOffice hours: Monday 10.30-11.30 and Thursday 9.30-10.30Appointments: 1:1 1
  2. 2. Introduction Aim of this section of the course Outline key texts and structure of the next 5 weeks Defining the macro-economy What variables are we looking at? Assessment: 2 hour written examination at the end of semester 2 (45%) 5questions in total – split between me and John’s regionaltopic I’ll go over some pointers in the last weekWeek 1:12
  3. 3. Aim of the course To provide an understanding of the macroeconomicfortunes of the UK in the post war period Discuss some policies ideological influences Identifying different schools of economic thought Bit of economic history, but bringing it up to date with thefinancial crisis and the ‘great recession’ Show you some data on UK performance But not just about the UK – need to look at it in context Empirically driven – not too much theory, but designed toput your theory into (a UK) contextWeek 1:13
  4. 4. Attendance1. Click 1 on your keypad and hold it down until aappears.
  5. 5. Macro Outline Introduction What are we looking at? What does Britain look like, in comparison? Post War British Macro Economic Policy The rise and fall of Keynesianism From the Welfare State to the Winter of discontent The Thatcher Years Monetarism and miners strike ERM and inflation targeting Blair Bank of England independence and the birth of the MPC Things can only get better? ICT and the productivity paradox The Great Recession Causes and consequences Policy solutions? Productivity paradox (II)Week 1:15
  6. 6. Recommended Reading Griffiths and Wall is a good place to start Older editions of the book have a chapter on Managing the Economy(Ch24 in 9th edition), available in the library. For the final part of the course, financial institutions and Ch30 –managing the economy post credit crunch – will be very informative This will be supplemented with recommended reading each week Need to recommend some articles and alternatives for the economichistory sections of the course The early lectures will be based on BWE Alford’s 1988 book, ‘British EconomicPerformance 1945-1975’. Tagged in the library – 4 copies available If you want some good, up-to-date commentary, take a look at the GreenBudget by the IFSWeek 1:16
  7. 7. Definitions:The Macro Economy Country-level indicators, constructed as part of the National Accounts Y=C+I+G+(X-M) But includes things that are left out of NA Price levels (inflation) Employment/labour force participation rates Indicators of performance and welfare PRODUCTIVITY (rate at which outputs are generated from inputs) Longer run indicators of economic footing National debt What are the policy levers available to governments? Varies over time and across different institutional set-ups Short termism versus medium and long term strategies Increasingly influenced by the wider global environment (Globalisation)Week 1:17
  8. 8. Objectives of Policy Full employment Anything below 3% was seen as acceptable Not been seen as a viable objective since the 1960s Stable prices In other words, low inflation 2.5% is the MPC’s specific target Economic Growth Results in higher living standards in most Western Economies RA Butler (1954) suggested a doubling of living standards every 25 years could bean explicit target Balance of Payments Aim for equilibrium (although surpluses are always considered positive)There are others, of a more socio-economic typeAchieving one of these ‘objectives’ might be feasible, but all at once??Week 1:18
  9. 9. Instruments of policy Why isn’t this the equilibrium situation? Market Failure rationale Almost all government subsidies/industrial support have toreason with the Treasury that the market has in some way‘failed’ before they can intervene How do governments go about it? Policy instruments: Fiscal policy Monetary policy Prices and incomes policy Exchange rate or import controlsWeek 1:19
  10. 10. Fiscal Policy Taxation and government spending Aim is to affect the composition and the level ofAggregate Demand in the economy Addresses redistribution of wealth – sort of… Higher taxes and lower spending is likely to lower AD Conversely – lower tax and higher spending shouldencourage AD Concerns about the Public Sector Borrowing Deficit (thePSBR) <<more next week>>Week 1:110
  11. 11. Monetary Policy The interest rate Affects the cost of borrowing And the returns to lending both long and short term investment decisions Leads consumers to change their behaviour also Low rates of interest offer little incentive to save Affects the balance of payments also Capital flows between countries Money Supply Monetarists versus Keynesians Monetarists see MS as affecting prices Keynesians see its impact on output and employment These two are linked, clearly…. expansionary or contractionary strategy will typically use the two togetherWeek 1:111
  12. 12. Prices and Incomes Policy Direct attempts to control inflation EG public Sector pay freeze Regarded as irrelevant to monetarists But an important tool in periods of expansion toKeynesians Not been extensively used since 1979 although limits onpublic sector spending have in effect constrained wagesWeek 1:112
  13. 13. Exchange Rate Used to influence the balance of payments Isn’t always something the national government can affect Prior to 1972, IMF system was implemented (Bretton Woods) Exchange rates affect the relative prices of domestic and foreigngoods Appreciation(Ex) => X and M Depreciation(Ex) => X and M Assuming appropriate elasticities for imports and exports, lowerexchange rate improves the balance of payments But it will also have an adverse effect on costs Rising input costs => higher prices=> higher wage demands==INFLATIONWeek 1:113
  14. 14. Import Controls Not used much in the UK as a policy instrument In fact, membership of EU (and its commitment to thefreedom of movement of goods and services) and long-standing Commonwealth links, trade has beenrelatively unhindered by government intervention fordecades (excluding WWII) The UK does participate in GATT (general agreementon tariff & trade) reductions for goods that havetraditionally carried a levyWeek 1:114
  15. 15. There are trade-offs Between inflation and unemployment The Phillips Curve (1958) Curbing government spending lowers earnings forpublic sector workers or reduce employment Raising the exchange rate makes exports relativelymore expensive and lowers (manufacturing) output So how do you balance multiple objectives? Instruments are not independent of one another AND instruments have in the past becomeobjectives Exchange rate instrument <<more when wediscuss the ERM>>Week 1:115
  16. 16. The Phillips Curve Each dot represents ayear 1913-1948 As wages increase(inflation)unemployment declinesWeek 1:116
  17. 17. Theory of Economic Policy Tinbergen (1952) Fixed targets Tinbergen’s rule – there should be at least as many instruments asthere are objectives Flexible targets (Theil, 1956) Pre-supposes that there is welfare loss associated with missing thefixed targets Implicitly assumes that there is a social welfare function for thepopulation It then becomes a question of weighting ‘Satisficing’ (Mosley, 1976) Policy makers are satisficing agents, influenced primarily by recentlevels Looking at the 1946-71 period Mosley found that any balance ofpayments deficit resulted in policy change – so that only zero orpositive BoP was satisfactory. Benchmark for unemployment was variable over timeWeek 1:117
  18. 18. Which of these definitions bestdescribes the term ‘satisficing’?181. Bureaucratic organisationsmaximise profits2. Bureaucratic organisationscontinually strive for the bestpossible outcomes3. Bureaucratic organisationsreact only when welfarereaches an unsatisfactorylevel
  19. 19. Two instruments, two objectivecaseWeek 1:119O1O2Instrument 1 (egmonetary policy)Instrument 2 (eg fiscalpolicy)0I1`I2`Source: Griffiths and Wall, 2001Movement away from theorigin is an expansionarypathO1 is objective 1 (internalbalance) at a particulartarget valueO2 is the objective 2(external balance) at aparticular target valueEAssume O1 is fullemployment andO2 is balance ofpayments equilibrium
  20. 20. Two instruments, 3 objective caseWeek 1:120O1O2Instrument 1 (egmonetary policy)Instrument 2(eg fiscalpolicy)0I1`I2`Source: Griffiths and Wall, 2001O3GFEnow with O3 –assume it iseconomic growth(positively sloped)
  21. 21. So, now you know… What we plan to cover over the next few weeks What the macro economy is, specifically concernedwith What are the chief objectives of government economicpolicy The tools available to governments who wish toinfluence the economyWeek 1:121
  22. 22. Tomorrow… We will look at Britain in context Plotting some of these key variables over time andacross countries that might reasonably be compared toBritain Discussing some of the reasons put forward for the UKpositionWeek 1:122
  23. 23. References used this week: Griffiths and Wall (2011) 12th Edition – handy for theTinbergen theory Mosley (1976) Towards a Satisficing theory ofEconomic Policy’, The Economic Journal, 86(341), 59-72 (available on JSTOR)Week 1:123