Macroeconomics: with study guide CD-ROM
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2011
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| Umfang: | XLIX, 561 S. graph. Darst. 1 CD-ROM (12 cm) |
| ISBN: | 9789814289443 9814289442 |
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| 245 | 1 | 0 | |a Macroeconomics |b with study guide CD-ROM |c Jagdish Handa |
| 264 | 1 | |a Singapore [u.a.] |b World Scientific |c 2011 | |
| 300 | |a XLIX, 561 S. |b graph. Darst. |e 1 CD-ROM (12 cm) | ||
| 336 | |b txt |2 rdacontent | ||
| 337 | |b n |2 rdamedia | ||
| 338 | |b nc |2 rdacarrier | ||
| 650 | 4 | |a Macroeconomics | |
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Datensatz im Suchindex
| _version_ | 1819350157312917504 |
|---|---|
| adam_text | Contents
Dedication
v
Preface
xxxv
About the Author
xliii
Glossary of Symbols
xlv
Useful Mathematical Symbols and Formulae for Economics
xlvii
Part I Introduction to Macroeconomics
1
1.
Output, Unemployment, and the Basic Concepts
3
1.1
Introduction to Macroeconomics
............................... 3
1.1.1
The nature of
macroeconomic
analysis
........................ 3
The classification of ¿roods in macroeconomics
..................... 4
Closed economy versus open economy analysis
..................... 4
Short-run
macroeconomic
theories, growth theories and business cycle theories
..... 4
1.2
The Classification of Economic Agents and Markets in Short-Run
Macroeconomic
Models
4
Box
1.1:
The Analytical Devices of the Short-Run Versus Long-Run Analysis
... 6
Real Time Concepts: The Short Term and the Long Term
........... 6
1.3
Introduction to AD-AS Analysis
................................ 6
1.3.1
The supply of commodities
.............................. 6
The long-run (equilibrium) aggregate supply of commodities
............. 6
The short-run aggregate supply of commodities
.................... 7
1.3.2
The components of aggregate demand
....................... 8
1.3.3
The diagrammatic AD-AS analysis
.......................... 8
The possibility of disequilibrium in the economy
.................... 8
The actual aggregate supply of commodities
...................... 9
The impact of an increase in aggregate demand.
................... 9
The impact of an increase in the long-run productive capacity of the economy
.... 10
The stability of equilibrium
.............................. 10
viii Macroeconomics
1.4
The Relationship between
Output,
Employment, and Unemployment in the Economy .
. 10
The labor force
..................................... 11
Unemployment
..................................... 11
1.5
Measures of National Output and Expenditures
........................ 12
1.5.1
Gross domestic product (GDP)
........................... 12
Fact Sheet
1.1:
Global Trends in GDP Per Capita,
1950-2003 .......... 13
1.5.2
Gross national product (GNP)
............................ 13
1.5.3
Net domestic product (NDP) and net national product (NNP)
.......... 14
Fact Sheet
1.2:
Comparing GDP and GNP,
1965-2004.............. 14
1.5.4
Measuring GDP
.................................... 14
Box
1.2:
GDP per capita as a Measure of the Standard of Living
.......... 17
GDP as a Measure of Welfare
........................... 18
1.6
Measuring the Price Level and the Rate of Inflation
...................... 18
1.6.1
Measures of the price level
.............................. 18
1.6.2
The inflation rate
................................... 19
Fact Sheet
1.3:
Inflation in Canada,
1915-2007 .................. 20
1.6.3
Core inflation
..................................... 20
Mathematical Box
1.1:
Calculation of the Price Index and Growth Rates
..... 21
The construction of a price index: an illustration
................. 21
Differences between Laspeyres and Paasche indices
............... 22
Separating the rate of growth of nominal income into the
real growth rate and the inflation rate
....................... 22
1.6.4
Deriving the rate of inflation from a price index
................... 24
Box
1.3:
Mathematical Formulae to Learn
..................... 24
Fact Sheet
1.4:
Measures of Inflation for the USA,
1960-2007.......... 25
1.6.5
Disinflation versus deflation
............................. 25
1.7
Nominal Versus Real Output
.................................. 26
1.8
The Economic Relationship between Real Output and Inflation
............... 26
1.9
The Nature of Economic Relationships
............................ 27
Box
1.4:
Definition of Equilibrium
......................... 27
Equilibrium conditions versus identities
...................... 27
Equilibrium versus disequilibrium
......................... 28
Stable versus unstable equilibrium
......................... 28
1.10
Exogenous and Endogenous Variables and the Concept of Shocks
in Macroeconomics
....................................... 28
1.10.1
An illustration
..................................... 29
1.10.2
Shocks
......................................... 29
1.10.3
Multipliers
....................................... 29
Contents ix
1.11
Growth Theory
.........................................
ЗО
1.11.1
Growth of the standard of living
...........................30
1.12
Business Cycle Theories
.....................................30
Fact Sheet
1.5:
Booms and Recessions in the USA Since
1960........... 31
Box
1.5:
The Fundamental Role of Economics as a Science
............ 32
Theories/models in economics
.......................... 33
Economics as the premier social science
..................... 33
1.13
Paradigms in Macroeconomics
............................., . . . 33
1.14
Economic and Political Systems: Organization of the Macroeconomy
............34
1.14.1
Capitalism
....................................... 34
1.14.2
Marxism and communism
.............................. 34
1.14.3
Socialism
........................................ 35
1.15
Conclusions
........................................... 35
Key Concepts
.......................................... 36
Critical Conclusions
....................................... 36
Review and Discussion Questions
............................... 37
Advanced and Technical Questions
.............................. 38
2.
Money, Prices, Interest Rates, and Fiscal Deficits
41
2.1
What Is Money and What Does It Do?
............................41
2.1.1
The functions of money
............................... 41
2.1.2
The practical definitions of money
.......................... 42
2.2
Money Supply and Money Stock
................................ 42
2.3
The Nominal Versus the Real Value of the Money Supply
.................. 43
2.4
Bonds and Stocks in Macroeconomics
............................. 44
2.5
The Definition of the Money Market in Macroeconomics
.................. 44
2.6
A Brief History of the Definition of Money
.......................... 45
2.7
The Current Definitions of Money and Related Concepts
.................. 46
Extended Analysis Box
2.1:
Current Meanings of the Symbols for the
Monetary Aggregates in Selected Countries
................... 46
The monetary aggregates for USA
........................ 46
The monetary aggregates for the Canada
..................... 46
The monetary aggregates for the UK
....................... 47
Fact Sheet
2.1:
Monetary Aggregates of the USA
.................. 47
2.8
The Monetary Base and Bank Reserves
............................48
2.8.1
The relationship between the monetary base and the money supply
........49
2.9
The Quantity Equation
.....................................49
2.9.1
The quantity equation in growth rates
........................50
2.9.2
The implications of the quantity equation for a persistently high inflation rate
. . 50
Fact Sheet
2.2:
Money Growth and Inflation in the USA,
1960-2008.......51
χ
Macroeconomics
2.10
The Quantity Theory
...................................... 51
Extended Analysis Box
2.2:
The Difference between the Quantity Theory
and the Quantity Equation
............................ 52
2.10.1
The transactions approach to the quantity theory
.................. 52
The adjustment period relevant to the quantity theory
................ 53
Is velocity constant over time!
............................. 53
Fact Sheet
2.3:
Velocity of Money in the USA,
1960-2008 ............ 54
2.11
The Definitions of Monetary and Fiscal Policies
........................ 54
2.12
The Central Bank and Monetary Policy
............................ 55
2.13
The Economic Aspects of the Government and Fiscal Policy
................. 55
2.13.1
The financing of fiscal deficits/surpluses and changes in the money supply
.... 56
The implications of the independence of the central bank from the government
f
or financing deficits
.................................. 57
2.13.2
The public debt
.................................... 57
2.13.3
The selective nature of government expenditures, taxes, and subsidies
....... 58
2.14
Interest Rates in the Economy
................................. 58
2.14.1
The Fisher equation on interest rates
......................... 58
Fact Sheet
2.4:
Nominal and Real Interest Rates in the USA,
1982-2008..... 60
2.14.2
The concept of present discounted value (PDV) of a bond
............. 61
2.14.3
Bubbles in asset prices
................................ 62
The importance of asset bubbles for output and business cycles
............. 62
Box
2.1:
The Determination of Stock Prices
..................... 63
Bubbles in house and land prices
......................... 63
A bubble in tulip bulb prices!
........................... 63
Conclusions
........................................... 64
Key Concepts
.......................................... 65
Summary of Critical Conclusions
................................ 65
Review and Discussion Questions
............................... 65
Advanced and Technical Questions
.............................. 66
3.
Introduction to the Open Economy: Exchange Rates and the Balance of Payments
67
3.1
Exchange Rates
......................................... 68
3.1.1
Three concepts of exchange rates
.......................... 68
The (nominal) exchange rate
............................. 68
The real exchange rate
................................. 68
The effective exchange rate
............................... 69
3.2
Fixed, Flexible, and Managed Exchanged Rates
........................ 70
3.3
Purchasing Power Parity (PPP) as a Theory of the Exchange Rate
.............. 70
3.3.1
PPP at the level of a single commodity
........................ 70
Absolute PPP among countries
............................ 71
Extended Analysis Box
3.1:
Does PPP Apply in the Real World?
An Illustration
................................... 71
Contents xi
3.4 Relative PPP
and Shifts in the
Relative
Efficiency of
Economies
............... 72
3.4.1
Long-run
changes in relative PPP
.......................... 73
3.4.2
Short-run
changes in relative PPP
.......................... 74
3.4.3
Implications
of
short-
run
PPP for exchange rates and inflation rates
........ 74
Box
3.1:
International
Comparisons of
Standards
of Living in Terms of PPP
... 74
3.5
Interest Rate Parity (IRP) and the Determination of the Exchange Rate
........... 76
3.5.1
The benchmark IRP theory
.............................. 76
3.5.2
The benchmark IRP as a determinant of the domestic interest rate
........ 77
3.5.3
The benchmark IRP as a theory of the exchange rate under flexible
exchange rates
..................................... 77
3.5.4
The role of speculative returns to stocks in capital flows and IRP
.......... 78
3.5.5
Extending IRP to incorporate risk factors and risk aversion
............. 78
Fact Sheet
3.1:
Interest Rate Differentials Between Countries
........... 79
3.5.6
The relative importance of PPP and IRP in determining exchange rates
...... 79
3.6
The Balance of Payments
.................................... 80
3.6.1
The components of the balance of payments
.................... 82
Fact Sheet
3.2:
United States Balance of Payments,
1976-2008.......... 82
3.6.2
Equilibrium in the balance of payments
....................... 83
3.6.3
The change in foreign exchange reserves
...................... 84
Fact Sheet
3.3:
US Foreign Exchange Reserves and Balance of Payments,
2005-2008...................................... 84
Equilibrium in the balance of payments
...................... 84
Foreign exchange reserves and short-term bonds
.................. 85
3.7
The Balance of Payments in an Accounting Sense
....................... 85
3.8
The Market for Foreign Exchange and the Changes in Foreign Exchange Reserves
..... 86
3.8.1
The demand and supply of foreign exchange
.................... 86
3.8.2
Equilibrium in the foreign exchange market
..................... 87
Extended Analysis Box
3.2:
The Demand and Supply of Foreign
Exchange Stated in Foreign Currencies
....................... 87
3.9
The Market Determination of the Nominal Exchange Rate
.................. 88
Fact Sheet
3.4:
Exchange Rates against the US Dollar,
1980-2008........ 89
3.9.1
Hot money
...................................... 89
Box
3.2:
National Policies on the Balance of Payments and
Accumulation of Foreign Exchange Reserves
................... 89
3.10
The Persistence of Balance of Payments Deficits and Surpluses
................ 90
Conclusions
........................................... 90
Key Concepts
.......................................... 91
xii
Macroeconomics
Summary of Critical Conclusions
................................91
Extended Analysis Box
3.1
.A: Comparison of the Actual and PPP Costs of the Big
Mac
..........................................91
Review and Discussion Questions
...............................92
Advanced and Technical Questions
..............................92
Part II Short-run Macroeconomics
95
4.
Determinants of Aggregate Demand: The Commodity Market of the Closed Economy
97
4.1
Symbols Used
..........................................97
4.2
The Commodity Sector of the Closed Economy
.......................97
4.2.1
Uses of national income
...............................97
4.2.2
Sources of national expenditures
...........................99
4.2.3
Equilibrium in the commodity market
........................99
4.2.4
National saving
....................................99
4.2.5
The relationship between saving and investment
..................100
4.2.6
The (physical) capital stock
..............................100
Box
4.1:
An Unjustified Oversimplification for a Modern Economy
........101
4.3
The Two Uses of Private Saving and the Drag of Deficits on Investment
..........101
4.4
Disequilibrium and the Role of Changes in Inventories in the Adjustment
to Equilibrium
.........................................102
4.4.1
The role of unintended changes in inventories
...................103
Extended Analysis Box
4.1:
A Simplified Diagrammatic Analysis:
The
45°
Diagram
..................................103
4.4.2
Limitations of the
45°
diagram for macroeconomic analysis
............105
4.5
For the Macroeconomic Analysis of the Closed Economy, Is There a
National Income Identity and One Between National Saving and Investment?
.......105
4.5.1
An accounting national income identity
.......................105
Extended Analysis Box
4.2:
The Distinction Between the Meanings
of Investment in Macroeconomics
.........................106
The actual change in the capital stock and the
definitions of investment
..............................107
4.6
Demand Behavior in the Commodity Market
.........................107
4.6.1
Consumption expenditures
..............................107
Fact Sheet
4.1:
Consumption and Disposable Income in the USA,
1980-2008 . . 109
Fact Sheet
4.2:
Interest Rates and Saving in the USA,
1985-2008.........110
4.6.2
The saving function
..................................109
Extended Analysis Box
4.3:
The Dependence of Consumption
on Wealth, Interest Rates
.............................
Ш
Contents xiii
The concept of lifetime wealth as the present discounted value
of future incomes
..................................
Ill
4.6.3
Investment expenditures
...............................113
4.6.4
Government expenditures and tax revenues
.....................115
Fact Sheet
4.3:
Interest Rates and Investment in the USA,
1960-2008......114
Extended Analysis Box
4.4:
Amore
Realistic Investment Function
........115
The impact of business confidence on investment
................115
Fact Sheet
4.4:
USA Fiscal Deficit,
1962-2008...................117
4.6.5
The commodity market and the price level
.....................118
4.7
The Commodity Market Model: The IS Equation/Curve
..................118
The impact of investment fluctuations on income:
a partial investment multiplier
............................119
Box
4.2:
The Mechanism of the Investment Multiplier: An Illustration
......120
The impact of fiscal policy on income: partial fiscal policy multipliers
........120
Box
4.3:
The Impact of a Balanced Budget: The Balanced Budget Multiplier
. . . 121
A word of caution on IS multipliers
........................121
The IS curve
.....................................122
Shifts in the IS curve versus movements along it
..................122
Extended Analysis Box
4.5:
The Slope of the IS Curve
...............123
4.8
Conclusions
...........................................124
Key Concepts
..........................................124
Summary of Critical Conclusions
................................124
Review and Discussion Questions
...............................124
Advanced and Technical Questions
..............................125
5.
Aggregate Demand in the Open Economy under an Interest Rate Target: Is-IRT Analysis
127
5.1
The Number of Goods and Markets in the Open Economy
.................127
5.2
The Foreign Exchange Sector of the Open Economy and the Balance
of Payments, Review
......................................128
5.2.1
Net interest payments and net transfer payments
..................130
5.2.2
Relationship between nominal and real interest rates
................130
5.3
The Commodity Market of the Open Economy
........................130
Fact Sheet
5.1:
Components of Aggregate Demand for USA, Canada, and
Thailand,
2007...................................132
5.3.1
The uses of private saving in the open economy
...................133
xiv
Macroeconomìcs
5.3.2
Three gaps: saving, fiscal, and external
........................133
Fact Sheet
5.2:
The uses of private saving in the USA,
1980-2008 ........134
5.3.3
Commodity market equilibrium and capital flows
..................135
Extended Analysis Box
5.1:
Financing high levels of domestic investment
during the development stages and foreign
exchange crises
...................................135
Foreign exchange crises and debt forgiveness
...................136
5.3.4
The open economy IS relationship
..........................137
The complete model of *the commodity sector forthe open economy
...........138
Box
5.1:
Derivation of the Open Economy is Equation
...............139
5.3.5
The open economy IS curve
.............................141
5.3.6
Shifts in the open economy IS curve
.........................142
Extended Analysis Box
5.2:
The Mathematical Derivation of the Slope
of the IS Curve
...................................142
Changes in the slope of the IS curve as the economy
becomes more open
................................142
Comparing the magnitudes of the fiscal multipliers
for open economies
................................143
The stability of aggregate demand in more open
economies
.....................................143
5.3.7
The impact of exchange rate changes on the IS curve
................143
5.4
The Formulation of Monetary Policy
.............................145
Box
5.2:
Money Supply, the Stock of Money and Their Relationship
with the Interest Rate
...............................145
5.4.1
Monetary policy through interest rate targeting
...................146
5.4.2
Rules versus discretion in setting the target interest rate
..............147
5.4.3
Diagrammatic depiction of the interest rate target
.................148
5.5
The Determination of Aggregate Demand under Interest Rate Targeting
..........148
5.5.1
Diagrammatic derivation of the AD curve
......................149
5.5.2
The downward slope of the AD curve in the open economy under
an exogenous interest rate target: a reiteration
...................150
5.6
The Policy Multipliers for the Open Economy Aggregate Demand
.............150
5.6.1
The impact of investment fluctuations on aggregate demand:
the investment multiplier
...............................150
5.6.2
The impact of fiscal policy on aggregate demand:
the fiscal multipliers
..................................151
5.6.3
The impact of monetary policy on aggregate demand:
the target rate multiplier
...............................151
5.6.4
The distribution of incomes, consumption patterns, and the size
of the multiplier
....................................151
Contents xv
5.6.5 The
impact
of exports on domestic aggregate demand
...............152
5.6.6
The lag in the impact of changes in the
interesirate
target
.............152
5.7
Diagrammatic Analysis of Fiscal and Monetary Policies
....................152
5.8
The IS,
IRT
Curves and the Determination of Output: A Caveat
..............153
5.9
But What about the Monetary Sector and Its Money Demand
and Supply Functions?
.....................................153
5.9.1
The demand for money
................................153
5.9.2
Ensuring equilibrium in the money market under an interest
rate target and the determination of the money supply
...............155
5.10
Managing Aggregate Demand in the Open Economy: Monetary and Fiscal
Policies under Flexible Exchange Rates
............................155
5.10.1
The effectiveness of fiscal policy for the open economy
under interest rate targeting
.............................155
5.10.2
The effectiveness of monetary policy for the open economy
under interest rate targeting
.............................156
5.10.3
Limitations on the effectiveness of a policy of interest rate targeting
........157
5.11
Internal Versus External Balance
................................157
Extended Analysis Box
5.3:
The Mundell-Fleming Model of the
Open Economy
...................................158
5.12
Conclusions
...........................................158
Key Concepts
..........................................159
Summary of Critical Conclusions
................................159
Review and Discussion Questions
...............................159
Advanced and Technical Questions
..............................160
6.
Aggregate Demand Under a Money Supply Operating Target: IS-LM Analysis
163
6.1
Monetary Policy
.........................................163
6.1.1
Reasons for choosing interest rate targeting over money supply targeting,
or vice versa
......................................164
Lags in the impact of money supply changes versus those of interest rate changes
. . . 164
Instability of money demand
.............................164
The informal financial sector and black money in developing economies
.......164
6.1.2
Choosing the monetary aggregate as the target variable
..............165
6.2
The Demand for Money
....................................166
6.3
The Motives for Holding Money
................................167
6.3.1
The volatility of the speculative demand for money
.................168
6.3.2
Other reasons for the volatility of the demand for money
..............168
6.4
The Standard Money Demand Function
............................168
Extended Analysis Box
6.1:
Special Cases of Money Demand
...........169
6.4.1
Equilibrium in the money market
..........................171
Disequilibrium in the money market
.........................171
6.5
The LM Equation
........................................172
6.5.1
The LM curve
.....................................172
xvi Macroeconomics
6.5.2
Shifts
in
the LM
curve
................................172
6.5.3
Shifts in the
LM
curve versus movements along it
..................174
6.5.4
Final comments on the LM curve
..........................174
Extended Analysis Box
6.2:
The potential general shape of the LM cur
ve
.....174
6.6
Deriving the Aggregate Demand for Commodities by Combining
the IS and LM Curves
.....................................175
6.6.1
The IS equation for the commodity market equilibrium
..............175
6.6.2
The relationship between the nominal and real interest rates
............175
6.6.3
Diagrammatic determination of aggregate demand
.................176
The IS, LM curves and the determination of output: a caveat
............177
6.7
The Impact of Expansionary Monetary and Fiscal Policies on Aggregate Demand
.....177
6.8
Bringing Aggregate Supply into the Open Economy Analysis, a Preview
of Chapters
7
to
9........................................178
6.8.1
The impact of an increase in aggregate demand on the quantity supplied
and the price level
...................................178
6.8.2
The impact of monetary and fiscal policies on equilibrium output
and price level in the open economy
.........................178
The short-run impact of aggregate demand changes on output
and the price level
...................................179
The long-run impact of aggregate demand changes on output
and the price level
...................................179
6.8.3
Disequilibrium in the domestic economy and stabilization through
monetary and fiscal policies
..............................179
6.8.4
Summation on the roles of monetary and fiscal policies
under flexible exchange rates
............................. 180
Extended Analysis Box
6.3:
The Mundell-Fleming Model
of the Open Economy
................................ 180
6.9
The Central Bank s Control Over the Money Supply
..................... 181
6.10
The Central Bank s Instruments for Changing the Monetary Base
.............. 182
6.10.1
Open market operations
...............................182
6.10.2
Shifting government deposits between the central bank and the commercial banks
in Canada
.......................................182
6.10.3
A mechanism for commercial banks to change the monetary base
.........183
6.11
The Central Banks Control Over the Monetary Base Multiplier
through Reserve Requirements
.................................183
6.12
The Impact of Discount Rate Changes on the Economy
...................184
6.12.1
The central bank s discount rate and interest rate differentials in the economy
. .184
6.13
The Determination of the Money Supply
...........................184
Extended Analysis Box
6.4:
The Creation of Demand Deposits
..........185
6.14
A Common Money Supply Formula for Ml
..........................186
6.14.1
The monetary base multiplier
............................187
6.14.2
Numerical examples
..................................188
6.15
Conclusions
..................................... 188
Key Concepts
..........................................188
Contents xvii
Critical Conclusions
.......................................189
Appendix
.......................................189
Determination of the
LM
curve
...........................189
Derivation of aggregate demand for the closed economy from its IS
and LM equations
...................................189
Intuition
.............................................190
Simplifying the AD equation for further analysis
.......................191
Determination of the long-run price level under an exogenous money supply
........191
Derivation of aggregate demand for the open economy from its IS and LM equations
.... 191
Review and Discussion Questions
...............................192
Advanced and Technical Questions
..............................193
7.
Full-Employment Output and the Natural Bate of Unemployment
195
7.1
The Production Function
....................................196
Fact Sheet
7.1:
Diminishing Marginal Product of Labor
..............197
Mathematical Box
7.1:
Examples of Production Functions and the Derivation
of the Marginal Product of Labor
.........................198
The general procedure for deriving the MPL from the production function
.......198
7.2
The Labor Market
.......................................200
7.2.1
Demand for labor
...................................200
Diagrammatic analysis
................................201
7.2.2
Supply of labor
....................................201
Extended Analysis Box
7.1:
The
Intertemporal
Analysis of Labor Supply
.....203
The Backward Bending Labor Supply Curve Over
Long Periods
....................................204
7.3
The Long-Run Equilibrium Levels of Employment and Output
...............205
7.3.1
The impact on long-run output of an increase in the price level or inflation rate
. 206
7.3.2
The diagrammatic analysis of employment and output
...............206
The effect on output of an improvement in labor productivity
.............206
7.3.3
The impact of aggregate demand on long-run output
...............206
The pursuit of fiscal policies
..............................207
The pursuit of expansionary monetary policies
.....................207
7.3.4
The ineffectiveness of monetary and fiscal policies in LR equilibrium
.......207
Mathematical Box
7.2:
The Derivation of the Demand for Labor,
Employment, and Output
.............................207
The role of aggregate demand in determining output
and the price level, an illustration
.........................208
The impact of expansionary monetary and fiscal policies
.............209
7.4
The Effects of an Increase in the MPL on LR Output
and Employment
........................................209
7.4.1
Diagrammatic analysis of the impact of an improvement in technology on output
and employment
...................................210
xviii
Macroeconomics
7.5
The effects of an Increase in Labor Supply on LR Output, Employment and Price Level
. . 210
Mathematical Box
7.3:
The Effect of an Improvement in Technology
.......211
7.6
Conclusions on Changes in the Equilibrium Levels of Employment and Output
......212
7.7
Full Employment and the Full-Employment Level of Output: Definitions and Conditions
. 213
7.8
The Role of Supply-Side Policies in Changing Full-Employment Output
..........213
7.9
Stagflation
............................................214
Fact Sheet
7.2:
The Price of Oil in the USA,
1960-2008..............214
Box
7.1:
The Impact of Oil Price Shocks on Full Employment
and Full-Employment Output in Oil Importing Countries
...........215
The impact of oil price increases on oil producing countries
...........216
Can expansionary monetary and fiscal policies eliminate this
stagflation?
.....................................216
Extended Analysis Box
7.2:
The Role of Demand-Side Policies in Changing
Full-Employment Output
.............................216
An implicit assumption in the above conclusions
.................217
7.10
Crowding Out of Investment by Fiscal Deficits, Given the LR Supply of Output in the
Closed Economy
........................................217
7.11
The Actual Level of Output in the Economy
.........................218
7.11.1
Changes in the actual rate of output over time
...................219
7.12
The Rate of Unemployment
..................................219
7.12.1
The LR equilibrium (natural) rate of unemployment
................220
Shifts in the natural rate of unemployment
......................220
The lack of impact of monetary and fiscal policies on the natural rate
of unemployment
....................................221
7.13
The Long-Run Equilibrium (Natural) Rate of Interest
....................221
The ineffectiveness of monetary policy and inflation in changing the long-run
real interest rate
.........................................222
7.14
Conclusions
...........................................222
Key Concepts
..........................................223
Summary of Critical Conclusions
................................223
Review and Discussion Questions
...............................223
Advanced and Technical Questions
..............................224
8.
Output in the Short Run: The Role of Expectations and Adjustment Costs
227
8.1
The Role of Uncertainty and Errors in Expectations
.....................228
8.1.1
The theory of rational expectations
.........................228
8.1.2
Random errors and their predictability
........................229
8.1.3
Application of rational expectations to monetary and fiscal policies
........229
8.2
Price Expectations and the Labor Market: Output and Employment
in the Context of Wage Contracts
...............................229
8.2.1
Labor supply in wage negotiations during the first stage
..............230
8.2.2
Employment during the contract period (the production stage)
..........230
Contents xix
8.2.3
Diagrammatic analysis
................................231
The effect of a proportional increase in the expected and actual price levels
......232
Conclusions from the contract wage analysis of production
..............232
The expectations augmented employment and output supply curves
..........233
Implications of the expectations augmented employment and output supply
equations for variations in employment and output over the business cycle
......233
Box
8.1:
Errors in Price Expectations, the Duration of the Wage Contract
and Cost-of-Living Clauses
............................234
8.3
Friedman s Expectations Augmented Employment and Output Rules
............234
Extended Mathematical Analysis Box
8.1:
Labor Demand when There
are Expectational Errors in the
Context of Nominal Wage Contracts
.......................235
The expectational equilibrium level of
employment
....................................236
The impact of expectational errors on
employment
....................................236
The Implications for Employment and
Output of Wage Contracts with
Expectational Errors in Prices
...........................237
8.4
Lucas Supply Rule with Errors in Price Expectations in Commodity Markets
........237
8.4.1
Firms responses to errors in expectations
......................239
Extended Analysis Box
8.2:
Diagrammatic Analysis: Comparing
the FSR and
LSR
Curves (FSR and
LSR)
and the
LRAS Curve
....................................239
8.5
The Implications of the FSR and
LSR
for the Impact
of Anticipated Demand Increases
................................240
8.6
The Implications of the FSR and the
LSR
for the Impact
of Unanticipated Demand Increases
..............................241
8.6.1
The impact of revisions in anticipations and real time
................241
8.6.2
Practical aspects of the FSR and
LSR
analysis
....................242
Extended Analysis Box
8.3:
The Implications of the FSR and
LSR
for the Impact of Monetary and Fiscal Policies
..................242
The Implications of Rational Expectations
for Systematic Monetary and Fiscal Policies
....................243
The Scope for Monetary and Fiscal Policies for
Stabilization when Private Demand is Volatile
..................244
The Scope for Monetary Policies and the Political
Economy of the Government s Budget
......................245
8.7
FSR and
LSR:
The Impact of Anticipated Permanent Supply Changes on the Economy
. . 245
xx
Macroeconomics
8.8
The Impact
of Unanticipated but Permanent Supply Changes on the Economy
.......246
Box
8.2:
Cost of Living Clauses
...........................247
8.9
The Short-and Long-Term Relationships between Output and Inflation
..........247
8.10
Empirical Validity of the FSR and the
LSR..........................248
8.11
Types of Adjustment Costs and Their Impact on Output
...................248
8.11.1
Firms responses to increases in the demand for their products
...........249
8.12
Menu Costs and Price Stickiness as the Explanation of the SRAS Curve
...........249
8.12.1
Aggregate supply in the sticky-price hypothesis
...................251
8.12.2
Monetary policy and the sticky-price SRAS curve
..................252
8.13
Costs of Adjusting Employment: Implicit Contracts as an Explanation
of the SRAS Curve
.......................................252
8.13.1
Variations in work effort over the short term
....................253
Box
8.3:
Work Effort in Restaurants During the Day
................253
Work Effort by Students over the Term and the Calendar Year
.........253
8.13.2
The Flexibility of the Employment-Output Nexus in the Short Term
.......254
Long-term labor contracts and labor hoarding
....................254
8.13.3
Okun s Rule: The Relationship between Unemployment
and Output Changes
.................................255
8.14
The Implications of Adjustment Costs for Persistence of Output and Employment
Fluctuations Over the Business Cycle
.............................256
8.15
Implications of Adjustment Costs for the Impact of Monetary and Fiscal Policies
......257
8.16
Stagflation and the Recessions of
1973-1975
and
1980 ...................257
Box
8.4:
Empirical Evidence on Price Changes, Wage Contracts
and Output Response
...............................257
8.17
Stylized Facts and Intuition on the Theories Explaining Variations in Output
........258
8.18
Conclusions
...........................................259
Key Concepts
..........................................260
Summary of Critical Conclusions
................................260
Review and Discussion Questions
...............................261
Advanced and Technical Questions
..............................263
9.
Actual Output, Disequilibrium, and the Interaction among Markets
267
Fact Sheet
9.1:
Money Growth and Output Growth in USA,
1960-2008.....269
9.1
The Relevance of Expectations on Variables Other Than Prices
...............269
9.2
Shocks to Aggregate Demand and Supply
...........................270
Examples of shocks to consumption
................................270
Examples of shocks to investment and net exports
........................271
Shocks to money demand and supply
...............................272
Shocks to the cost and availability of credit
...........................272
9.2.1
Shocks to the aggregate supply of commodities
...................272
9.3
An Analysis of the Disequilibrium Following a Demand Shock
................273
Contents xxi
9.3.1
The assumptions for disequilibrium analysis
.....................273
Effective aggregate demand and supply
........................273
Extended Analysis Box
9.1:
The Dynamics Required for the Maintenance
of a Full-Employment Scenario
..........................274
9.3.2
A plausible dynamic scenario
.............................275
Initial effects of the emergence of a demand deficiency
................275
Secondary effects of the demand deficiency
.......................275
The transition from the old equilibrium to the new one
................275
Output-price adjustment function [Optional]
....................276
Box
9.1:
The Nature and Critical Role of Expectations in Dynamic Adjustments
. 276
9.4
Diagrammatic Analysis Following
а Баїї
in Aggregate Demand
................278
Effective demand for labor
...................................279
9.5
Disequilibrium with Flexible Prices and Wages
........................279
Extended Analysis Box
9.2:
The Relative Rapidity of Commodity Markets
in Adjusting Prices versus those by Firms and
Consumers in Adjusting Production, Employment,
and Prices
......................................279
The failure or sluggishness of the labor market in
adjusting nominal wages versus the faster responses
of firms and workers in adjusting employment and
consumption
....................................280
9.6
If the Real-World, Real-Time Economy is not on its LRAS or SRAS Curve,
Where will it be?
........................................281
9.7
Can the Economy Get Stuck Below Full Employment?
....................281
Impact of the disequilibrium on the long run: hysteresis
.....................282
9.8
Optimal Monetary and Fiscal Policies for the Demand-Deficient Economy
.........282
The use of expansionary monetary policies
............................282
Limits to the effectiveness of monetary policies in a
demand-deficient recession
....................................283
The use of fiscal policy: increases in government expenditures and/or cuts in taxes
.......283
The policy dilemma
.......................................284
Fact Sheet
9.2:
Economies in Disequilibrium: USA During the
Great Depression
..................................284
Recapitulation of the roles of monetary and fiscal policies in a demand-deficient economy
. . .286
Extended Analysis Box
9.3:
Disagreements Among Economists on the
Appropriate Policies in Real Time for a Real-World
Economy
......................................287
9.9
Excess Demand18 in the Economy and Appropriate Policies
.................287
9.10
Asymmetry in the Economy s Responses to Deficient and Excess Demand
.........288
9.11
An Analysis of Disequilibrium Following a Supply Shock
...................288
xxii
Macroeconomics
9.11.1
Supply shocks from labor productivity
........................288
The scope for monetary and fiscal policies
.......................289
Box
9.2:
Demand Shocks Emanating from Shifts in Long-Run Supply
......290
9.11.2
The impact of a decline in credit supply on the effective
supply of commodities
................................290
9.12
Crowding-Out or Crowding-In of Investment by Fiscal Expenditures
in a Demand-Deficient Economy?
...............................291
9.13
Disequilibrium (Involuntary Unemployment) in the Labor Market due
to a High Real Wage
......................................291
Expansionary monetary policy as a means of lowering the real wage and restoring
equilibrium in the labor market
.................................292
Extended Analysis Box
9.4:
Is the preceding demand-deficient analysis a reflection
of market failure or of markets sluggishness in
adjustment of prices and nominal wages?
.....................293
9.14
The Dual Implications of a High Saving Rate
.........................293
The paradox of a high saving rate
—
also known as the paradox of thrift
............293
9.15
Conclusions
...........................................294
Key Concepts
..........................................295
Summary of Critical Conclusions
................................295
Review and Discussion Questions
...............................296
Advanced and Technical Questions
..............................297
10.
Employment, Unemployment, and Inflation
301
10.1
Definitions of the Labor Force and Labor Supply
.......................301
10.1.1
Frictional unemployment and actual employment
in labor market equilibrium
..............................302
The notions of matched labor supply and matched labor demand
in the presence of frictional unemployment
......................304
10.1.2
Discouraged workers
.................................304
10.1.3
Other determinants of the equilibrium level of unemployment
...........305
Box
10.1:
The Labor Force Participation Rate
...................305
The non-employment rate
.............................306
Shifts in labor force participation rates in recent decades
...............306
Fact Sheet
10.1:
Participation Rates in Canada and the United States, Male and
Female,
1980-2008................................307
10.2
The Components of Unemployment
..............................307
The diagrammatic depiction of the components of unemployment
........308
10.3
Involuntary Unemployment
..................................308
Involuntary unemployment due to a high real wage
......................309
Involuntary unemployment due to the emergence of a demand deficiency
............309
Involuntary unemployment due to a credit crisis
........................309
Contents xxiii
The variation in the number of discouraged workers with the state of the economy
.......309
10.4
The Actual Rate of Unemployment
..............................310
Fact Sheet
10.2:
Unemployment Rates in Selected Countries,
1985-2008 . . . . 311
10.4.1
The division of unemployment into natural and cyclical unemployment
......312
10.4.2
Changes in the actual rate of unemployment over time
...............313
Short-run and long-run variations in the natural rate of unemployment
......313
Pact Sheet
10.4:....................................313
Estimating the natural rate of unemployment
....................314
Fact Sheet
10.5:
Unemployment and Trend Unemployment in the
United States,
1980-2008.............................314
10.5
Policies to Reduce Structural Unemployment
.........................315
Extended Analysis Box
10.1:
Changes in Structural Unemployment
........316
The impact of fiscal and monetary policies on
structural unemployment
.............................316
10.6
Policies to Reduce Frictional Unemployment
.........................317
10.7
Measuring Involuntary Unemployment
............................317
Two ways of measuring involuntary unemployment
.......................317
Monetary and fiscal policies to reduce involuntary unemployment
...............318
Box
10.2:
Causes High Unemployment in Canada and Europe
Relative to the USA
................................318
10.8
The Costs of Unemployment
..................................319
10.9
Relationship Between Unemployment and the Inflation Rate from the AD-AS Analysis
. . 320
10.10
Phillips Curve (PC)
.......................................321
10.10.1
Use of the Phillips curve as a policy trade-off
....................322
10.10.2
Instability of the Phillips curve
............................322
10.11
Deviations of the SR Equilibrium Unemployment Rate from the Natural One
.......322
Fact Sheet
10.6:
Historical Phillips Curves in the United States,
1960-1995 . . . 323
10.11.1
Friedman and the expectations augmented Phillips curve (EAPC)
.........323
10.11.2
Expectational equilibrium and the natural rate
...................325
Extended Analysis Box
10.2:
The Friedman AND Lucas Supply Rules
.......325
Expectational errors and the commodity markets:
The Lucas supply rule
...............................326
10.12
The Implications of the EAPC for Shifts in the Phillips Curve and for Policy
........326
The relationship between the Phillips curve and the EAPC
...................327
10.13
The EAPC and the Non-Accelerating Inflation Rate of Unemployment
...........328
10.14
The Implications of the EAPC for the Impact of Anticipated and Unanticipated Demand
Increases
.............................................
xxiv
Macroeconomics
10.15
The Determinants of
Inflation.................................328
Fact Sheet
10.7:....................................329
Another way of stating the determinants of inflation
......................330
10.16
The Costs of Inflation
......................................330
10.16.1
Inflation under perfect competition with fully anticipated inflation for all future
periods: the costs of inflation in the analytical long-run case
............330
An intermediate scenario: anticipated inflation in the commodity
and labor markets for some quarters ahead
......................332
10.16.2
The costs of unanticipated inflation
.........................332
A caveat
........................................333
Box
10.3:
The Impact of Hyperinflation on Long-Term Output Growth
and the Standard of Living: Practical Experience in Contrast
to Theory
......................................333
10.17
The Sacrifice Ratio
.......................................334
Fact Sheet
10.8:
Sacrifice Ratio in the United States,
1950-2008.........334
10.17.1
Gradualist versus Cold Turkey Policies of Disinflation
...............334
10.17.2
Indexation to the rate of inflation: should nominal wages and interest rates be
indexed?
........................................335
10.18
Conclusions
...........................................335
Key Concepts
..........................................337
Summary of Critical Conclusions
................................337
Review and Discussion Questions
...............................338
Advanced and Technical Questions
..............................338
11.
Paradigms in Macroeconomics
341
Stylized Facts on Money, Prices, and Output
.........................342
11.1
An Analogy for the Two Main Paradigms in Macroeconomics
................343
11.1.1
The approach of the classical paradigm to the pathology of the economy
.....344
11.1.2
The approach of the Keynesian paradigm to the pathology of the economy
. . . .344
Extended Analysis Box
11.1:
The Fundamental Assumptions of the Classical
Paradigm
......................................345
11.2
Defining and Demarcating the Models of the Classical Paradigm
..............346
11.2.1
The traditional classical approach
...........................347
Extended Analysis Box
11.2:
The Founders of the Classical Tradition in
Macroeconomics
..................................34g
David Hume
(1711-1776)............................348
Adam Smith
(1723-1790).............................348
David
Ricardo (1772-1823)............................349
Contents xxv
11.2.2
The neoclassical model
................................349
Box
11.1:
Some Major Misconceptions about Traditional Classical
and Neoclassical Approaches in the Classical Paradigm
..............350
11.2.3
The
1970s
monetarism
................................351
11.2.4
The modern classical model
.............................352
11.2.5
The new classical model
...............................353
Extended Analysis Box
11.3:
The Founders of the Classical Approach
in the Modern Period
...............................353
Milton Friedman
(1912-2006)..........................353
Robert Lucas (1937-)
...............................354
Extended Analysis Box
11.4:
The Economic Contributions
of Milton Friedman
................................355
11.2.6
Milton Friedman and the Keynesians
........................355
11.2.7
The relationship between the Monetarists and Friedman
..............356
11.2.8
Friedman and the modern classical school
......................356
11.3
The Keynesian Paradigm
....................................357
Extended Analysis Box
11.5:
The Founders of the Keynesian Paradigm
......358
Knut Wickseil (1851-1926)............................358
John Maynard Keynes
(1883-1946) .......................358
11.3.1
Development of the Keynesian schools after Keynes
................359
11.3.2
Frequent themes in the Keynesianparadigm
.....................359
New Keynesian economics
...............................360
11.3.3
The variety of Keynesian models
...........................360
Monetary and fiscal policy effects in Keynesian models
................361
11.3.4
The critical role of dynamic analysis when aggregate demand falls
.........361
Box
11.2:
The Keynesian-Neoclassical Synthesis on Aggregate Demand
......362
11.4
The Reformulation of Keynesian Approaches
.........................362
11.4.1
NeoKeynesian building blocks for the reformulation
of Keynesian macroeconomics
............................362
11.4.2
Taylor rule and its incorporation into Keynesian macroeconomics
.........363
11.4.3
The new Keynesian model
..............................363
11.5
The Credit and Economic Crisis of
2007-2010:
Which Theory Can Explain It?
......364
11.6
Which Macroeconomic Paradigm Should One Believe In and Use?
.............365
Box
11.3:
The Anatomy of Two Quite Different Recessions:
1973-1975
and
2001-2002............................365
11.7
Paradigms and Policies
.....................................366
11.7.1
Stabilization versus pro-active policies
........................366
11.7.2
Rules versus discretion in the pursuit of policies
...................366
11.8
The Role of the Government in the Macroeconomy
.....................366
11.8.1
Evolution of ideas about the role of the government
................367
xxvi
Macroeconomics
11.8.2
Classical and Keynesian approaches and the debates
on the size of the government
............................368
11.9
Conclusions
...........................................368
Keynesian versus classical economics in relation to the real world and real time
.......369
Key Concepts
..........................................370
Summary of Critical Conclusions
................................371
Review and Discussion Questions
...............................371
Advanced and Technical Questions
..............................372
Part III Topics in Open Economy Macroeconomics
373
12.
The Foreign Exchange Market, IMF, and Globalization
375
12.1
Review of PPP
..........................................376
12.2
Review of Interest Rate Parity (IRP) Theory
.........................377
12.2.1
IRP as a theory of the interest rate
..........................377
The importance of stock market returns for capital flows: a problem.
for the IRP theory
...................................378
Fact Sheet
12.1:
Interest Rate Differentials between Countries
...........378
Simplified form of the benchmark IRP for short-run analysis
.............379
Covered versus uncovered IRP
.............................379
12.2.2
IRP as a theory of the exchange rate
.........................380
The inconsistency between the IRP s implications and common observations
.....381
12.2.3
The impact of expectations on exchange rates
....................382
12.3
PPP and IRP Combined
....................................383
Long run analysis
........................................383
Short run analysis
........................................383
12.4
The Market for Foreign Exchange, a Review
.........................384
Fact Sheet
12.2:
Interest Rates and Net Capital Flows in the USA,
1985-2008 . . 386
12.4.1
The relationship between the balance of payments and (D$
—
S$)
.........386
12.4.2
Diagrammatic analysis
................................386
12.5
Demand and Supply Elasticities
................................388
12.6
The
J
Curve for the Value of Net Exports in Real Time
....................388
12.6.1
Limitations of the commodity-based exchange market analysis
...........390
12.6.2
Policy implications of the
J
curve
...........................390
Extended Analysis Box
12.1:
The General Experience of Industrialized
Countries and LDCs on the
J
Curve
.......................391
Implications of the above analysis for movements
of exchange rates under flexible exchange rates
..................391
12.7
Historical Experience with Flexible Versus Fixed Exchange Rates
..............392
12.8
Measures to Reduce Balance of Payments Deficits
.......................393
12.9
The International Monetary Fund (IMF)
...........................394
Contents xxvii
12.9.1
The IMF and disequilibrium in the balance of payments
of the member countries
...............................395
Extended Analysis Box
12.2:
IMF Conditionality
..................395
For whose benefit are the IMF policies?
......................396
12.9.2
The IMF and capital flows
..............................396
12.9.3
Special drawing rights (SDRs)
............................397
Extended Analysis Box
12.3:
The World s Demand for Liquidity
.........397
Exchange and financial crises
...........................398
Is the IMF a central banker for the world?
....................398
Does the world economy need a central bank?
..................399
The rising demand for the IMF to create a world
currency
......................................399
12.10
The International Transmission of Crises and Business Cycles
................400
12.11
Economic Globalization
....................................400
12.11.1
Causes of the push for global markets
........................401
12.11.2
Measures of the extent of globalization
.......................402
12.11.3
Other aspects of globalization
............................403
12.11.4
Globalization and modernization
..........................403
12.11.5
The persistence of nationalistic mercantilism
—
globalization limited
to truncated globalization
..............................404
12.11.6
The possibility of net losses from globalization
...................405
12.11.7
Effects of globalization on commodity and capital flows
..............405
12.12
Conclusions
...........................................406
Key Concepts
..........................................408
Summary of Critical Conclusions
................................408
Review and Discussion Questions
...............................409
Advanced and Technical Questions
..............................409
13.
The Open Economy Under a Fixed Exchange Rate Regime
411
13.1
The Balance of Payments (BP) Equilibrium Curve Under Fixed Exchange Rates
......411
13.2
The IS-LM Model for the Open Economy Under Fixed Exchange Rates
..........413
13.2.1
The slope of the BP curve
..............................413
13.2.2
The relative slopes of the LM and BP curves
....................413
Extended Analysis Box
13.1:
Differences between the IS-LM Diagrams
for the Flexible and Fixed Exchange Rates
....................414
13.2.3
General equilibrium under fixed exchange rates, a diagrammatic treatment
. . . .414
13.3
Managing Aggregate Demand in the Open Economy: Monetary and Fiscal Policies Under
Fixed Exchange Rates
......................................415
13.3.1
The impact of an expansionary fiscal policy on aggregate demand
.........416
xxviii
Macroeconomics
13.3.2
The impact of an expansionary monetary policy on aggregate demand
......416
Extended Analysis Box
13.2:
Monetary and Fiscal Policies in the Case
of Interest-Insensitive Capital Flows and Fixed
Exchange Rates
...................................417
13.4
Bringing Aggregate Supply into the IS-LM Analysis with a Fixed Exchange Rate
......418
13.5
Macroeconomic Equilibrium in the Small Open Economy with Full Employment and IRP
418
13.5.1
Fiscal policies under IRP and full employment
...................419
13.5.2
Monetary policy under IRP and full employment
..................419
13.6
PPP, the World Rate of Inflation and the Convergence in National Inflation Rates
.....420
13.6.1
The world rate of inflation in the fixed exchange rate case
.............420
Box
13.1:
The impact of a large economy on smaller economies
..........421
13.7
Economic Blocs, Fixed Exchange Rates and the Convergence in Inflation Rates
......421
13.8
Disequilibrium in the Domestic Economy and Stabilization through Monetary
and Fiscal Policies: The Fixed Exchange Rate Case with Interest
Sensitive Capital Flows
.....................................421
A caveat
........................................422
Extended Analysis Box
13.3:
Disequilibrium in the Domestic Economy
and Stabilization through Monetary and Fiscal
Policies: The Fixed Exchange Rate Case with
Interest Insensitive Capital Flows
.........................422
13.9
The Need for Monetary and Fiscal Policies under Fixed Exchange Rates
..........423
13.9.1
Internal versus external balance
...........................423
13.9.2
Anote
of caution on the use of monetary and fiscal policies
............424
13.10
The Effect of Relatively Different Improvements
in Productivity at Home and Abroad under Fixed
Exchange Rates
.........................................424
13.11
The Political Economy of Exchange Rates: The Choice between Fixed
and Flexible Exchange Rate Regimes
.............................425
13.12
Other Tools for Handling Balance of Payments Deficits
...................426
Extended Analysis Box
13.4:
The Gold Standard and the Gold Exchange
Standard
......................................426
13.13
Summary of the Costs and Benefits of a Fixed Exchange Rate
................428
13.14
Dollarization
..........................................429
13.14.1
Dollarization and different productivity growth rates
................431
Extended Analysis Box
13.5:
A Dual Currency System: Dollarization
Along with a Separate National Currency
.....................431
13.15
Currency Boards
........................................432
13.16
Conclusions
...........................................432
Key Concepts
.........................................433
Summary of Critical Conclusions
................................433
Contents xxix
Review and
Discussion Questions...............................
434
Advanced and Technical
Questions
..............................434
Part
IV Growth Economics
437
14.
Classical Growth Theory
439
Fact Sheet
14.1:
Long-Term Real GDP Growth in Selected Countries,
1960-2003 ..................................... 439
Fact Sheet
14.2:
Real GDP Growth Rates in the USA
...............440
Extended Analysis Box
14.1:
Setting the Boundaries of
Macroeconomic
Growth Theory
..................................442
14.1
The Classical (Solow s) Growth Model s Assumptions
....................443
14.1.1
The technology of production
............................443
14.1.2
Saving, investment and the change in the capital stock
...............444
14.1.3
Labor force growth
..................................445
14.2
The Analysis of the Solow Model
...............................445
14.3
Diagrammatic Analysis of the Solow Model
..........................446
14.3.1
The
SS
growth rate of output
............................447
Extended Analysis Box
14.2:
Variability of the Saving Rate
.............448
14.3.2
The impact of shifts in the saving rate
........................448
Mathematical Box
14.1:
Numerical example A
...................449
14.3.3
The impact of shifts in the labor force growth rate
.................450
Mathematical Box
14.2:
Numerical example
В
...................451
14.4
The Growth Implications of a More General Production Function
.............452
14.5
Convergence Versus Divergence in Output per capita among Countries
...........453
14.6
Assessing the Importance of Technical Change in the Solow Model16
............454
14.6.1
Solow s estimates of the contribution of technical change to the improvement
in living standards
...................................457
Mathematical Box
14.3:
Numerical Examples on Technical Change
........457
14.6.2
The residual as the unexplained component of growth
...............458
Mathematical Box
14.4:
Detailed Estimation of the Contributions
to Economic Growth
...............................458
Estimating the returns to different educational levels
...............458
14.7
Some Empirical Findings on the Contributions to Growth
..................461
14.8
The Solow Growth Model with Exogenous Changes in the Quality of Labor
........461
14.8.1
Diagrammatic analysis
................................463
xxx
Macroeconomics
14.8.2
The role of
human capital
in changing the quality of labor
.............464
Extended Analysis Box
14.3:
The Variability of the Labor Force
Growth Rate
....................................465
14.8.3
Technical change with falling or negative labor force growth rates
.........465
14.8.4
Shifts in participation rates
..............................466
Fact Sheet
14.3:
Participation Rates in Canada and the USA, Male and Female,
1980-2008 ..................................... 466
Box
14.2:
The Implications of Increases in the Labor Force Participation
of Women
.....................................467
14.9
SS
Growth versus Level Effects of Exogenous Shifts
.....................468
14.10
The Implications of the Solow Analyses for Policy
......................468
Fact Sheet
14.4:
Real GDP Per Capita,
2003
Population Growth Rates
......469
Box
14.3:
Historical Growth Patterns, Labor force Growth, and
Technology Shifts
.................................469
14.10.1
Malthus s theory of economic growth and the Malthusian stage
..........471
14.10.2
The post-Malthusian stage
..............................472
14.10.3
The modern growth stage
..............................472
14.11
Conclusions
...........................................473
Key Concepts
..........................................474
Summary of Critical Conclusions
................................474
Review and Discussion Questions
...............................474
Advanced and Technical Questions
..............................475
15.
Advanced Topics in Growth Theory
481
15.1
Technology, Knowledge and Externalities
...........................482
15.1.1
The distinction between endogenous and exogenous technical change
......482
15.1.2
The definition of capital in endogenous growth theories
..............483
15.1.3
The externalities of new knowledge
.........................483
Box
15.1:
Inventions, Innovations, and Patents
...................484
Innovations versus inventions as forms of technical change
...........484
15.1.4
Patents and the protection of copyright, intellectual property and trade secrets
. . 485
Recent changes in patent protection
..........................486
15.2
The Production of New Knowledge
..............................486
15.2.1
Diagrammatic analysis
................................488
15.3
The Dissemination of Knowledge Across Countries
......................488
15.4
Diagrammatic Analysis
.....................................490
15.4.1
Growth rates and capital flows among countries
..................491
15.4.2
Convergence and divergence in living standards between countries
........491
Contents xxxi
15.4.3
Continuous growth in the advanced economies
...................492
Box
15.2:
Foreign Aid and Investment
—
and Capital Drain
............492
15.5
The Historical Experience of Growth
.............................492
Box
15.3:
Economic Globalization and Endogenous Technical Change
......493
Technology Clusters
................................493
Globalization and Patents
.............................494
15.6
Human Capital
.........................................494
Box
15.4:
The Innovative Process and Its Creative Destruction
..........494
15.7
The Implications of Endogenous Growth Theories for
Macroeconomic
Policies
......496
Extended Analysis Box
15.1:
International Linkages and Growth
.........497
15.8
The Importance of the Inflation Rate and the Quantity of Money for Growth
.......498
Box
15.5:
The Role of the Financial Sector in Growth: Some Conclusions
from Economic History
..............................499
15.9
The Role of the Financial Sector in Growth: Recent Empirical Evidence
...........500
15.10
The Miracle of Economic Growth
...............................501
15.10.1
The miracle of growth and financial crises in the economic tigers
.........501
15.10.2
The economic crisis of
2007-2010
in the USA
...................501
Extended Analysis Box
15.2:
The Economic, Social, and Political
Environment for Growth: Markets, Competition,
Capitalism, and
Entrepreneurship
.........................502
15.11
Empirical Evidence on the Contributors to Growth
......................503
15.11.1
Empirical evidence on growth in recent decades
..................504
15.12
Conclusions
...........................................505
Conclusions from endogenous growth theory
.........................505
Conclusions on money, the financial sector, and growth
...................506
Key Concepts
..........................................507
Summary of Critical Conclusions
................................507
Review and Discussion Questions
...............................508
Advanced and Technical Questions
..............................508
16.
Business Cycles, Crises, and The International Transmission of Economic Activity
511
16.1
Recessions and Booms in Economic Activity
.........................513
16.1.1
The popular statistical designation of a recession
..................513
16.1.2
Monetary and fiscal policies to combat a recession
.................514
Fact Sheet
16.1:
Output Gap in the United States (USA),
1980-2008......515
16.2
Business Cycles and the Growth Trend in Economic Activity
.................516
Box
16.1:
Eliminating the Trend from the Data
...................516
Deriving the trend rate of output
.........................516
The unemployment rate as the proxy for the output gap
.............517
xxxii
Macroeconomics
16.3
Stylized Facts of Business Cycles
................................517
16.4
The Behavior of Variables Over the Business Cycle
......................518
16.4.1
Procyclical, acyclical, and countercyclical movements
................ 518
16.4.2
Leading, lagging, and coincident variables
...................... 518
16.4.3
The volatility of variables over time
......................... 519
16.5
Business Cycles, the Full Employment Assumption and the Classical
and Keynesian Paradigms
....................................519
Box
16.2:
Business Cycles and The Assumption of Full Employment
.......521
16.6
The General
ЛО-ЛЅ
Theory of Business Cycles
.......................521
Fact Sheet
16.2:
The Structure of the AD-AS Model
................523
16.6.1
The propagation mechanism
.............................523
Box
16.3:
An Illustration of Technical Change Creating Cycles through
Aggregate Demand Shifts
.............................524
16.7
The Modern Classical Approach to Business Cycles
......................525
16.7.1
Real business cycle theory
..............................526
16.7.2
Policy implications of the RBC theories
.......................528
16.8
Keynesian Explanations of the Business Cycle
.........................528
16.8.1
The multiplier-accelerator model of aggregate demand
...............529
16.8.2
Limitations of the validity of the multiplier-accelerator model
...........530
Extended Analysis Box
16.1:
A Taxonomy of the General Reasons
for the Occurrence of Business Cycles
.......................531
16.9
International Linkages Among National Business Cycles
...................532
16.9.1
A world business cycle
................................533
16.10
Crises in Economic Activity
...................................533
Fact Sheet
16.3:
The Asian Crisis of the
Mid-1990s ................533
16.11
Long-Term Effects of Recessions and Booms
.........................535
16.11.1
The accumulation of human capital
.........................535
16.11.2
The accumulation of physical capital
.........................536
16.11.3
Technical change
...................................536
16.11.4
The longer-term effects of cyclical fluctuations through aggregate demand
. . . .536
16.11.5
The longer-term impact of recessions and booms
..................537
16.11.6
The implications of hysteresis for policy
.......................537
16.12
Money, Credit and Business Cycles
..............................538
16.12.1
Money supply and business cycles
..........................538
16.12.2
Credit and business cycles
..............................538
16.12.3
Economic crises
....................................540
16.12.4
Some instances of financial crises
...........................540
Contents xxxiii
16.13
The Relevance of Monetary
and
Fiscal Policies
to
Business
Cycles
..............541
Box
16.4:
Anatomy of the Financial and Economic Crisis of
2007-2010
in the World Economy
...............................542
The policy responses
................................543
16.14
Inflation and Unemployment
..................................543
16.15
Conclusions
...........................................545
Key Concepts
..........................................545
Summary of Critical Conclusions
................................546
Review and Discussion Questions
...............................546
Advanced and Technical Questions
..............................547
Index
549
|
| any_adam_object | 1 |
| author | Handa, Jagdish 1939- |
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| indexdate | 2024-12-20T14:01:37Z |
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| isbn | 9789814289443 9814289442 |
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| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-018707838 |
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| physical | XLIX, 561 S. graph. Darst. 1 CD-ROM (12 cm) |
| publishDate | 2011 |
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| spellingShingle | Handa, Jagdish 1939- Macroeconomics with study guide CD-ROM Macroeconomics Makroökonomie (DE-588)4037174-8 gnd |
| subject_GND | (DE-588)4037174-8 (DE-588)4123623-3 |
| title | Macroeconomics with study guide CD-ROM |
| title_auth | Macroeconomics with study guide CD-ROM |
| title_exact_search | Macroeconomics with study guide CD-ROM |
| title_full | Macroeconomics with study guide CD-ROM Jagdish Handa |
| title_fullStr | Macroeconomics with study guide CD-ROM Jagdish Handa |
| title_full_unstemmed | Macroeconomics with study guide CD-ROM Jagdish Handa |
| title_short | Macroeconomics |
| title_sort | macroeconomics with study guide cd rom |
| title_sub | with study guide CD-ROM |
| topic | Macroeconomics Makroökonomie (DE-588)4037174-8 gnd |
| topic_facet | Macroeconomics Makroökonomie Lehrbuch |
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