Transcript Week 14: Macroeconomics and fiscal policy

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
Real U.S. GDP per year, 1947-2008
(trillions of 2000 dollars, seasonally adjusted quarterly data )
12
11
10
9
8
7
6
5
4
3
2
1
Note: Trend line shown is a rough estimate of "potential"GDP.
Source: U.S. Bureau of Economic Analysis (www.bea.gov/national)
Dividing the pie:
How is it used? How is it made? How is it earned?
Click here for the latest figures:
US data on demand
US data on supply
US data on income
How does macroeconomics matter for trade?
• What is “macroeconomics”, anyway?
• How would it enter our diagrams?
From week 3, the three-panel diagram…
What if our currency falls in value?
(e.g. more US$ per foreign currency)
Our country (US)
Int’l. Trade
Rest of the world (ROW)
Sexports
Dimports
Q
(tons)
Q
(tons)
Q
(thou. tons)
More simply, from week 4’s “small country diagrams”,
When our currency falls in value…
An importable good
Price
($/unit)
Pt
D
An exportable good
D
S
Pt
S
How does agriculture fit in?
• “Devaluation” or “depreciation” of the currency
helps producers of any tradable, whether exported
or imported
• Agriculture is a major producer of tradables, using
non-tradable land and labor; a low value of the
currency helps farmers!
• But note that currency depreciation hurts most
consumers, who are net buyers of tradable goods,
and net sellers of non-tradables…
How has the U.S. exchange rate moved?
Real Exchange Rate (2005=100)
[foreign currency per US dollar, reverse scale]
The Real Exchange Rate Facing U.S. Agriculture, 1970-2008
80
90
100
110
120
130
140
Note: Left scale is inverted, so a rise in the solid line is a decline in the value of the U.S. dollar.
Source: Calculated from ERS/USDA data (www.ers.ursda.gov/data/macroeconomics;.
The exchange rate and farm income
80
120
Real Exch. Rate (left scale, 2005=100)
90
Net Farm Income (right scale, 2000 US$)
100
100
80
110
60
120
40
130
20
140
0
Real Net Farm Income (billions of 2000 US$)
Real Exchange Rate (2005=100)
[foreign currency per US dollar, reverse scale]
The Real Exchange Rate and Net Farm Income in the United States, 1970-2008
Note: Left scale is inverted, so a rise in the solid line is a decline in the value of the U.S. dollar.
Source: Calculated from ERS/USDA data (www.ers.ursda.gov/data/macroeconomics; www.ers.usda.giv/data/farmincome.
We can think of this using a PPF and
indifference curves
Qty of
other
goods
Foreigners are trading with us along the
dashed line, at price = Pag/Pother
Gains from trade
Qd
Qs
exports
Qty. of ag goods
Adding up all tradable goods on the X axis…
Qty of
other
goods
(all nontradables,
e.g. most
services)
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)
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.
Qty of
other
goods
(all nontradables,
e.g. most
services)
Gains from borrowing
(but note losses if/when
we have to pay back!)
Qs
Qd
Qty. of all tradable goods
(e.g. farm products)
…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