Week 14: Macroeconomics and fiscal policy - Department of ...

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Oct 28, 2013 (4 years and 12 days ago)

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AGEC 340


International Economic Development

Course slides for week 14 (April 13 & 15)


Macroeconomic Policy*


Exchange rates and inflation


Monetary and fiscal policy

* If you are following the textbook, this is chapter 18.

The U.S. economy

Dividing the pie:

How is it used? How is it made? How is it earned?

US data on income

US data on demand

US data on supply

Click here for the latest figures:

How does macroeconomics matter for trade?


What is “macroeconomics”, anyway?





How would it enter our diagrams?


Our country (US)

Rest of the world (ROW)

Int’l. Trade

Q

(tons)

S
exports

D
imports

Q

(tons)

Q

(thou. tons)

From week 3, the three
-
panel diagram…

What if our currency falls in value?

(e.g. more US$ per foreign currency)

More simply, from week 4’s “small country diagrams”,


When our currency falls in value…

Pt

S

D

Price

($/unit)

Pt

S

D

An importable good

An exportable good

How does agriculture fit in?


“Devaluation” or “depreciation” of the currency
helps producers of any tradable, whether exported
or imported


Agriculture is a major producer of tradables, using
non
-
tradable land and labor; a low value of the
currency helps farmers!


But note that currency depreciation hurts most
consumers, who are net buyers of tradable goods,
and net sellers of non
-
tradables…



How has the U.S. exchange rate moved?

The exchange rate and farm income

Qty. of ag goods

Qty of
other
goods

We can think of this using a PPF and
indifference curves

Foreigners are trading with us along the
dashed line, at price = Pag/Pother

Qs

Qd

exports

Gains from trade

Qty. of all tradable goods

(e.g. farm products)

Qty of
other
goods
(all non
-
tradables,
e.g. most
services)

Adding up
all tradable goods

on the X axis…

If total exports = imports
(exactly balanced trade), then
the slope of the “price line”
here would be Pt/Pother

Qty. of all tradable goods

(e.g. farm products)

Qty of
other
goods
(all non
-
tradables,
e.g. most
services)

Now we can see effects of macro policy:

What if our country (e.g. the U.S.) borrows
money from the rest of the world?

Then we have “capital inflows”
and a matching “trade deficit”; we
consume more tradables than we
produce: Pt/Pother is lower than
if we did not borrow.

Qs

Qd

Gains from borrowing
(but note losses if/when
we have to pay back!)

…but now back to the textbook!

What does the U.S government actually do?


The U.S. Government Printing Office publishes all
our official documents,


e.g. for the budget, historical data is here:

http://www.gpoaccess.gov/usbudget/fy11/

note especially:

Receipts and Outlays as Percentages of GDP: 1930

2015

Receipts by Source as Percentages of GDP: 1934

2015

Outlays by Function and Subfunction: 1962

2015


Some conclusions from macroeconomics


A key function of government is to stabilize the economy over
time, by borrowing more in bad times and saving more during
boom periods.


A key “macroeconomic” variable is the international exchange rate,
which determines the prices of all internationally
-
traded goods
relative to domestic ones.


To maximize long
-
run national income, governments should pursue
freer international trade, and focus its interventions remedies for
market failure.


Next week: foreign investment, migration and aid