Comparative Economic Policy Unit 4

Economic growth

Increase in the monetary value of all the final goods and services produced in a specific time period by a territory

GDP

consumption + Net exports + investments + government spending

NDP (Net Domestic Product)

GDP minus depreciation (wear and tear of machinery, buildings, etc.).

Gives a more accurate picture of sustainable income.

Nominal GDP

Total value of all goods and services produced at current prices (not adjusted for inflation).

Good for understanding total market size, but not useful for comparing over time.

Real GDP

Same as nominal GDP, but adjusted for inflation.

Shows real growth in output over time.

GNP (Gross National Product)

GDP plus net income from abroad (income earned by citizens and firms abroad, minus what foreigners earn domestically).

Focuses on the national economy, not just what's produced within borders.

PPP GDP (Purchasing Power Parity)

GDP adjusted for cost of living differences between countries.

Allows better international comparisons of economic well-being.

Solow-Swan model

exogenous growth model. Explains long-run economic growth based on supply-side factors. Technological progress (A) comes from outside the system.

Endogenous growth model

Economic growth can be explained from within the system through policy choices, institutions and investment decisions

Balanced of Payments Constrained Growth model (Thirlwall's law)

Y = C + I + PE + (X-M)

Countrys foreign trade limits its long-run growth

Growth policies that government can use use to boost long-term economic performance

1) Supply policies 2) demand policies 3) institutional development policies

Supply policies

1) investment incentive policies

2) policies to increase labor supply

3) productivity/efficiency policies

Demand policies

1) domestic market policies

2)Keynesian demand policies

3)Export-promoting policies

4) Import substitution policies

Institutional development policies

aim to strengthen the legal and political framework that supports long-term economic growth. They support investment and productivity by reducing uncertainty and encouraging innovation

Full employment

Everyone who wants to find a job can find one

Frictional unemployment

People being in the process of moving from one job to another

Seasonal unemployment

people are temporarily out of work due to the seasonal nature of certain industries or jobs

Cyclical unemploymnt

results directly from cycles of economic upturn and downturn

Structural unemployment

Mismatch between the skills that worker can offer, and the skills demanded by the employers. The productive sector is not able to employ active population

Neoclassical labor supply

amount of labor that workers are willing to offer at each wage level

Neoclassical labor demand

amount of labor that firms are willing to hire at each wage level

Neoclassical Labour market

Under conditions of perfect competition, any imbalance (unemployment) will be automatically corrected through wage flexibility

Keynesian Labour supply

does not mainly depend on wages but it is shaped by democratic and social factors. Shaped more by institutions and social norms than how much people are paid

Keynesian Labour demand

derived demand meaning that firms only hire workers if there is demand for their products

Keynesian Labour market

Sticky wages. Wages do not fall easily even when unemployment is high

Active labour market policies

Get people back into job

Passive labour market policies

Support income during unemployment

Characteristics and trends of employment in developed countries

1) outsourcing

2) polarization

3) deterioration of working conditions

Equity

Any difference that occurs between individuals in the course of life is the result of individual effort, capacity or success

Equality

aims for social positions within the social structure to be close to each other. It allows mobility by narrowing distances between groups

Neoclassical take on inequality

1)A natural outcome of individual differences

2) A way to incentivize investment and innovation

3) Tickle down effect

Keynesian take on inequality

1) inequality reduces domestic demand because

rich people save more, while poorer people spend more of their income

2) too much to rich-->aggregate demand falls

3) hurts economic stability and growth

Marxist take on inequality

1) inequality is inherent in capitalism

2) Capitalists(owners) extract surplus from workers (labor), creating exploitation

Effects of inequality

1) Political effects

2) Social effects

3) economic effects

Main drivers of income inequality

1) economic

2) Technical progress / education

3)Political/institutional

Predistribution

focuses on shaping the market outcomes before inequality happens: education, UBI

Redistribution

focuses on correcting inequality after market outcomes: taxation, pension, UBI

Price stability

keep prices relatively constant over time, avoiding both high inflation and deflation to create predictability for consumers, businesses and investors

Inflation

A sustained and significant increase in the general price level. Reduces purchasing power of money

Core inflation

more stable measure of inflation. It excludes volatile prices like food and energy, which can fluctuate a lot in the short term. Often used by central banks for policy decisions

Disinflation

inflation is still happening, but at a slower rate. Example from 6% to 4% inflation = disinflation

Deflation

A decrease in the general price level. Can lead to economic stagnation when people delay purchases

CPI Consumer price index

measures average price change of a basket of goods/services consumed by households. Products are weights based on their importance in household spending

PPI producer price index

measures price changes for producers. Indicates cost changes before they reach consumers. A leading indicator of inflation

Demand side drivers of inflation

Demand curve AD shifted to the right AD' causing inflation

As demand rises, output Y increases only a bit, but prices increase significantly because the economy is close to full capacity

Monetarist view Demand side drivers of inflation

inflation is always a monetary phenomenon. Inflation driver excess M

Keynesian view Demand side drivers of inflation

inflation as a result of excess demand when resources are fully used. Inflation driver: aggregate demand excess

Supply side drivers of inflation

Demand AD hasn't changes, but prices go up because cost of production have increased. Firms produce less but charge higher prices->stagflation

Inflation as a socio-political conflict

can also come from conflicts between social groups trying to increase their share of income.

1) wages go up→ firms raise prices to maintain profits

2) prices go up →workers demand higher wages again

3) repeat