Transcript Lecture 5 & 6

Topic 2: Recent developments and
prospects
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IMF
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
European Commission

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Economic forecasts
Central Statistics Office
Central Bank of Ireland
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
(Article IV) Staff Report on Ireland
Quarterly Bulletin
Department of Finance
ESRI
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Quarterly Economic Commentary
Recent data
Quarterly National Accounts data for
Quarter 2 2006 released by CSO on 28/9
 Real GDP was up 5% in 2006:Q2
compared with 2004:Q2 (year-on-year)
 Real GNP was up 9%!
 Inflation rising
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Source: CSO
GDP versus GNP
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GDP  factors of production located in
Ireland
GNP  factors of production owned by
Irish residents
GNP = GDP less net factor income from rest
of the world
Source: CSO
Inflation rising
IMF Staff Report 2006
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Ireland’s economic performance remains
strong
However, economic activity has become
reliant on building investment and
competitiveness has eroded
Contributions to GDP growth
When Yt = Xt + …..., then
% contribution of X to growth in Y
= (Xt – Xt-4)/Xt-4  (Xt-4/Yt-4)  100
= (Xt – Xt-4)/Yt-4  100
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Note: Chain-linked real components do not add
up exactly to GDP.
Competitiveness
Real exchange rate (R)
R = e × (P*/P)
where
e = nominal exchange rate
P* = foreign price level
P = domestic price level
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Real effective exchange rate
(REER)
a.k.a. trade-weighted real exchange rate

REER = weighted average of the bilateral
real exchange rates

weights are the value of Ireland's trade with
the respective countries
Labour productivity (LP)
LP growth= %Y - %L
= % A + a % K - a% L
= % A + a % (K/L)
Competitiveness
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What is happening to relative wage rates?
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http://www.bls.gov/news.release/ichcc.toc.htm
Why not use unit labour costs (ULC)?
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Problem: productivity exaggerated in some
foreign-MNC-dominated industries (see
Honohan and Walsh)
Key policy issues
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The FSAP Update found that the financial system
continues to perform well, but rapid credit growth is a
vulnerability. The strengthening of the regulatory and
supervisory framework should continue
Staff recommends modest fiscal tightening, given the
need to dampen aggregate demand, build a cushion
against the risk of a hard landing, and prepare for
population aging
Continued wage moderation and labor market flexibility
are essential to support competitiveness
ESRI Quarterly Economic
Commentary, Autumn 2006