Transcript MACROECONOMIC POLICY IN THE ASIA

MACROECONOMIC POLICY IN
THE ASIA-PACIFIC
GECO6400
ECONOMIC GROWTH
MACROECONOMIC POLICY CHALLENGES
COURSE REVISION
ECONOMIC GROWTH
The Asia-Pacific region consists of economic systems
that range from free market to centrally planned.
Free market-based capitalist economies experience
regular periodic fluctuations in the production of
output.
Such fluctuations are often referred to as business
cycles.
ECONOMIC GROWTH
COUNTRY
Australia
China
Hong Kong
India
Indonesia
Japan
Malaysia
New Zealand
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
ECONOMIC SYSTEM RESOURCE OWNERSHIP
Free market
Centrally Planned
Free Market
Mixed
Free market
Free market
Mixed
Free market
Free Market
Free Market
Free Market
Free Market
Free Market
Free Market
Private
State
Private
State and Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
ECONOMIC GROWTH
The Business Cycle
The business cycle refers to the irregular fluctuation of
real output in a capitalist economy over a period of
time.
This fluctuation tends to be wave-like and consists of 4
recurring phases:
Peak
Recession
Trough
Recovery
ECONOMIC GROWTH
Wavelength
Change
in GDP
PEAK
RECOVERY
RECESSION
A
m
p
l
i
t
u
d
e
TROUGH
Time
ECONOMIC GROWTH
Phases
Repetitive aspects of the cycle.
 Peak:
economic activity reaches a maximum
 Recession:
 Trough:
decline in economic activity
economic activity reaches a minimum
 Recovery:
increase in economic activity.
ECONOMIC GROWTH
Causes
What turns the cycle?
 Man-made
 Political
 Technological
 Natural
 Disasters
 Discovery
ECONOMIC GROWTH
Characteristics
How to determine what phase of the cycle predominates.
 Output
 Employment
 Inflation
 Aggregate
Demand
 Consumption
 Investment
 Exports
and imports
ECONOMIC GROWTH
Mechanisms
What keeps the cycle going?
 Aggregate Expenditure
 Consumption
 Investment
 Exports

Expectations
ECONOMIC GROWTH
PHASE
POSSIBLE CAUSES
High output
Low unemployment
High prices
High Aggregate demand
PEAK
RECESSION
Natural disaster
War
Declining output
Rising unemployment
Falling prices
Decreasing aggregate demand
Low output
High unemployment
Low prices
Low Aggregate demand
TROUGH
RECOVERY
CHARACTERISTICS
Breaking of a drought
Discovery of new technology
Innovation
Rising output
Declining unemployment
Rising prices
Rising Aggregate demand
ECONOMIC GROWTH
INDIA’S ECONOMIC GROWTH
12
10
8
% 6
change 4
in GDP
2
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
-2
1952
0
-4
-6
YEAR
Source: Patnaik, Ila and Rachna Sharma, ‘Business Cycles in the Indian Economy’,
Margin, Vol.35, No.1, pp.71-79, October-December 2002.
ECONOMIC GROWTH
Class Task
Find one complete business cycle and provide years for:
Peak
Recession
Trough
Recovery
Discuss any macroeconomic problems associated with the
phases of the cycle and suggest policies to alleviate
them.
MACROECONOMIC POLICY
CHALLENGES
Overview
Economic integration in the Asia-Pacific region has been advancing
rapidly over the past decade, driven by growing intra-regional
trade, increasing investment and financial integration.
Based on regional and bilateral free-trade agreements as well as
emerging financial cooperation arrangements, this process is likely
to increase over time.
Reflecting increasing trade and investment flows, business cycles
across countries in the region are becoming more correlated.
MACROECONOMIC POLICY
CHALLENGES
Challenges
1. Development and integration of different economic
systems
2. Managing growth and development
 Infrastructure development
 Structural reform
 Climate change
 Ageing population
 Income distribution
MACROECONOMIC POLICY
CHALLENGES
4. Global Integration
 Trade Policies
 open vs closed
 global vs regional and
 multilateral vs bilateral
 Capital Markets
 Regulation of international capital flows
 Financial system regulation
 Exchange rate systems
5. Balance of development
 Distribution of gains between economies
COURSE REVISION
THE MACROECONOMY
 The Economic Problem
 The Circular Flow of Income
 Economic Sectors
 Measuring Output: GDP, methods, nominal and real,
alternative measures of economic welfare (HDI,
GPI).
COURSE REVISION
MEASURING EMPLOYMENT AND INFLATION
 Defining and measuring unemployment
 Unemployment rate, Participation rate
 Types of unemployment
 Discouraged workers
 Defining and measuring inflation
 Costs of inflation
 The Philips Curve
COURSE REVISION
MACROECONOMIC MODELS
 Aggregate Expenditure Model
 Economic sectors
 AE=C+I+G+(X-M)
 45-degree line diagram
 MPC and MPS, APC and APS
 Equilibrium Income (Y=AE)
 Multiplier
COURSE REVISION
MACROECONOMIC MODELS
 Aggregate Demand and Aggregate Supply
 Aggregate Demand
 Aggregate Supply: short-run and long-run
 Movements along vs shifts
 Equilibrium
 Application of AD-AS model: inflation, Stagflation
COURSE REVISION
FISCAL POLICY
 Federal Budget Outcome
 Financing a Budget Deficit
 Discretionary and non-discretionary Fiscal Policy
 Automatic Stabilisers
 Fiscal Policy transmission mechanism
 Crowding Out
 Net export effect
 Problems with Fiscal Policy
COURSE REVISION
MONEY AND BANKING
 Defining money
 Money Demand and Money Supply
 Credit creation: reserves, reserve ratio
MONETARY POLICY
 Open Market Operations
 Monetary Policy transmission mechanism
 Monetary Policy, interest rates and exchange rates
 Second-round effects of Monetary Policy
COURSE REVISION
INTERNATIONAL TRADE AND THE BALANCE OF
PAYMENTS
 Current Account: Current Account Deficit
 Capital and Financial Account
 Terms of Trade
 Foreign Debt
 Twin Deficits
COURSE REVISION
EXCHANGE RATES
 Definition and determination
 Exchange rate systems
 Flexible
 Managed
 Fixed
interest rates and exchange rates
Purchasing Power Parity
COURSE REVISION
ECONOMIC GROWTH
 Business Cycles