Lecture I Macroeconomic data and policies and what

Lecture I Macroeconomic data and policies … and what is this course about?

I. 1 Long-term economic growth

Real GDP p. c. , 1870 – 2009: USA, CND, AUS, J 1990 International Geary – Khamis dollars 35, 000 30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 0 1870 1880 1890 1900 1910 USA 1920 1930 Canada 1940 1950 Australia 1960 1970 Japan 1980 1990 2000

Real GDP p. c. , 1870 – 2009: USA, CND, AUS, J 100, 000 1990 International Geary – Khamis dollars, log scale 10, 000 100 1870 1880 1890 1900 1910 USA 1920 1930 Canada 1940 1950 Australia 1960 1970 Japan 1980 1990 2000

Real GDP p. c. , 1870 – 2009: F, D, I, UK 1990 International Geary – Khamis dollars 25, 000 20, 000 15, 000 10, 000 5, 000 0 1870 1880 1890 1900 1910 1920 France 1930 1940 Germany 1950 Italy 1960 1970 UK 1980 1990 2000

Real GDP p. c. , 1870 – 2009: F, D, I, UK 100, 000 1990 International Geary – Khamis dollars, log scale 10, 000 1870 1880 1890 1900 1910 1920 France 1930 1940 Germany 1950 Italy 1960 UK 1970 1980 1990 2000

Real GDP p. c. , 1900 – 2009: ARG, S 1990 International Geary – Khamis dollars 30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 0 1900 1910 1920 1930 1940 1950 Argentina 1960 Sweden 1970 1980 1990 2000

GDP p. c. in 1900 and 2009 and average growth rate 1990 International Geary-Khamis dollars 35, 000 30, 000 3. 0% 2. 5% 25, 000 2. 0% 20, 000 1. 5% 15, 000 1. 0% 10, 000 0. 5% 5, 000 1900 ar Fin k la n No d rw Sw ay e Ar den ge nt in a In d M ia ex ico Br az il Ch in a UK nm Au n st Be ria Sw lgiu itz m Ne erla th nd er la nd Fr s a Ge nce rm an y Ita ly pa De Ja lia ra st Au na Ca US da 0. 0% A 0 2009 AGR(%)

Economic growth 1870 - 2009 • Long-term GDP trends – GDP: total amount of goods and services within geographic locations minus intermediate production • Positive GDP growth since second half of 19 th century – Acceleration after WWII • Factors of long-term growth – labor, capital, technology (parameters of production function) • Growth and income distribution • Is GDP an ideal measure of material wellbeing?

I. 2 Economic cycles, deficits and debts

Real GDP, %yoy 8. 0 6. 0 4. 0 2. 0 0. 0 -2. 0 -4. 0 -6. 0 1984 1988 1992 1996 EU 2000 USA 2004 2008 2012

Economic cycles • Short-term oscillations around GDP longterm trend • Successive periods of fast economic growth and slow-down (consolidation) - economic (business) cycles • Why does the cycle occur, is it inevitable? • Inherent feature of capitalism? • What can be done to avoid/mitigate cycles? • macroeconomic policies, main subject of this course

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Unemployment, % 14. 0 12. 0 10. 0 8. 0 6. 0 4. 0 2. 0 0. 0 Euro area UK USA

Inflation • Different measures: CPI (prevailing), GDP deflator and others • Intuitive: inflation rate as rate of change of average level of prices • What´s so wrong about inflation? • Social evil as serious as unemployment • The specter of hyperinflations (see Lecture III) • Is low inflation always desirable ? • A crucial change in inflation since 1950 s compared to centuries before: almost always positive (compared to previous periods)

Cyclical GDP fluctuations and unemployment • Unemployment rate: number of unemployed related to total labor force • But see textbooks for proper definitions • Negative social phenomenon, persists in both advanced and developing economies • Wider implications for long-term growth, danger of political turmoil, etc. • Higher unemployment in Europe compared to US before the crisis • Negative correlation between output and unemployment • Okun‘s „law“ (see Lecture VII)

Inflation (CPI), %yoy 16 14 12 10 8 6 4 2 0 -2 1980 1984 1988 1992 1996 EU 2000 USA 2004 2008 2012

Inflation and unemployment • Link between inflation and unemployment • Inflation procyclical, unemployment countercyclical • Negative correlation in the short-term: is there a „trade-off“? • Phillips curve (Lectures VII and VIII) • Very low negative (if at all) correlation over the long-term

Inflation vs. unemployment, % 4. 5 14. 0 12. 0 3. 5 3. 0 10. 0 2. 5 2. 0 8. 0 1. 5 6. 0 1. 0 4. 0 0. 5 0. 0 2. 0 -0. 5 -1. 0 0. 0 1992 1996 Euro Inf 2000 US Inf 2004 Euro Unemp (r. h. ) 2008 2012 US Unemp (r. h. )

Inflation vs. unemployment, % US, long-term 12. 0 16. 0 14. 0 10. 0 12. 0 8. 0 10. 0 8. 0 6. 0 4. 0 2. 0 0. 0 -2. 0 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 0. 0 Un. Rate CPI (rhs)

Money and inflation • See definition of various money aggregates in textbooks • Demand for money • Central banks and money supply • Inflation as a monetary phenomena – As opposed to inflation vs. unemployment trade-off (Phillips curve, see Lectures VII and VIII) • Money and economic growth

Euro zone, M 3, %mom

Governments: Deficits and Debts • Deficit (net lending): the difference between revenues and expenditures of a particular government – Easy said, difficult to define and statistically cover – Net or gross (interest payments) • Debt: on most general level – a public finance debt (total for the country) to both private and public creditors – Net or gross again

00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 99 19 98 19 97 19 96 19 95 19 Government Net Lending, %GDP 10 5 0 -5 -10 -15 -20 -25 -30 -35 Germany Greece Ireland Spain

Gross debt, %GDP 140 120 USA 100 80 60 40 20 0 1870 1890 1910 1930 1950 1970 1990 2010 180 Italy 160 140 120 100 80 60 40 20 0 1870 1890 1910 1930 1950 1970 1990 2010 90 80 70 60 50 40 30 20 10 0 1880 Germany 1900 1920 140 1960 1980 2000 Belgium 120 100 80 60 40 20 0 1870 1890 Source: This time is different (www. rheinhartandrogoff. com/data 1910 1930 1950 1970 1990 2010

Open economy: Current Account • Each country has economic (trade, financial, etc. ) relations with the rest of the world, that to much extent determine their policies – Small economies (NL, B, CZ, H, etc. ) always, since recently, this applies for all (including the largest, US, J, UK, etc. ) • Balance of payments (Bo. P), is reflected by increase/decrease of international reserves at central bank, two main accounts: – Current account: the difference between total exports and total imports of goods and services of a particular country • Surplus: country lends abroad, but problem of being repaid; deficit (CAD): country borrows abroad, must repay the debt in the future – Financial account: mirrors flows at current account

Current Account Deficit, %GDP 10 5 0 -5 -10 -15 -20 1991 1993 1995 1997 1999 2001 D 2003 GRE 2005 2007 2009 2011

Open economy: exchange rate • Nominal Ex. R: price of foreign currency in terms of units of other currency, 1€ = 25 CZK, 1$ = 20 CZK • Real Ex. R: price (expressed in domestic currency) of a reference basket (considered as one unit) in a foreign country relative to the reference basket in domestic country (again considered as one unit): e=(E. P*)/P, where P (P*) is domestic (foreign) price level • Floating and fixed Ex. R, depreciation (devaluation) and appreciation (revaluation) • Effective Ex. R: trade weighted

Nominal Exchange Rates, till 2011 1. 7 Nominal Ex. R: USD/EUR, d-data 45. 00 40. 00 1. 5 35. 00 1. 3 30. 00 1. 1 25. 00 20. 00 0. 9 0. 7 4/1/1999 38 36 15. 00 4/1/2003 4/1/2007 4/1/2011 Nominal Ex. R: CZK/EUR, m-data 34 32 30 28 26 24 22 31/1/2000 31/1/2003 31/1/2006 31/1/2009 10. 00 31/1/2000 140 130 120 110 100 90 80 70 60 1993 -01 31/1/2003 31/1/2006 31/1/2009 Nominal Effective Ex. R m-data, I/2003 = 100 1997 -01 2001 -01 CZK 2005 -01 USD EUR 2009 -01

REER: CZK, EUR I/2005=100, m-data 140 130 120 CZK EUR 110 100 90 80 70 31/1/1998 31/1/2002 31/1/2006 31/1/2010

I. 3 Depressions, financial and economic crises

Depressions • Protracted contraction of economic activity (real economic growth), accompanied by long-lasting unemployment • Fall of living standard, pauperization of relatively large groups of population • Usually (not always!) accompanied by deflation (fall of aggregate price level) • Most severe example – Great Depression of 1930 s (Lecture IV), second in line – recent crisis since September 2008

Great Depression, USA 1929 - 1941

Peripheral countries, unemployment, %, 2001 - 2013 Only modest decline til l 2018 30 25 20 15 10 5 0 2001 2003 2005 Spain 2007 Greece Portugal 2009 Ireland 2011 2013

Financial and banking sector and macroeconomics • Financial markets (and banks) – central role in modern economies – Collecting resources (savings) from households and lend them • Financing economic activity, including debt financing of the governments (sovereigns) • Financial markets and risk • Different crisis that might into the real economy – Very often situation in real economy might contribute to crisis • Crisis: banking, sovereign debt crisis (both external and internal), inflation crisis, currency crashes

I. 4 Macroeconomic policies

Adam Smith • 1723 – 1790 • Political economist and philosopher • 1751 – professor of logic at Glasgow University • 1759 – Theory of Moral Sentiments • 1776 - An Inquiry in the Nature and Causes of the Wealth of Nations

Laissez faire capitalism • Free market and political democracy • Price as basic signal for production decisions (what, how, for whom) • Private ownership of means of production • Small government and minimal governmental policies/interventions • Efficient allocation of the resource assumed to be achieved via market efficiency

Karl Marx • 1818 - 1883 • Philosopher, sociologist, historian, political economist, political theorist, revolutionary socialist • Communist Manifesto (1848, with Friedrich Engels) • Das Kapital (volume I 1869, volume II and III published posthumously) • Ideological founder of Marxism

Central planning (socialism) • Consumption decided and resources allocated through the planning system, not according price signals • State ownership of productive means • Equal distribution of the wealth • Inconsistency with political democracy, need for centralized political power

John Maynard Keynes • 1883 -1946 • Cambridge, UK • Thinker – economics, logic, probability • Practitioner – Treasury during WWI, advisor to the War Cabinet at WWII, crucial role at the birth of IMF/WB

Mixed capitalist economy • Prevailing private ownership, cohabitating with the state ownership of certain assets • Free market cohabitating with governmental policies to cope with the deficiencies of the free market • Welfare state policies • Share of state sector and the extent governmental intervention – dividing line within the profession of macroeconomics

Macroeconomic policies • Nevertheless, mixed economy is a matter of fact as are macroeconomic policies – Fiscal policy: budget and taxes – Monetary policy: administered by central banks – Exchange rate policy: usually central banks plus Mo. Fs – International trade policy: governments • This course: covers almost exclusively only the policies above • Distinguish from policies, not explicitly discussed here: • Aimed to promote long-term (sustainable) growth • Aimed to ensure socially proper welfare distribution

Post-2009: new paradigm in the horizon? • Global financial and economic crisis 2008/9 – perceived as failure of macroeconomic policies to a. forestall a crisis of this dimension to happen b. restart effectivelly the economies after the crisis • Lesson – different policies to different situation

Prerequisites • Basic knowledge of microeconomics is welcome • Macroeconomics – any text that covers material, comparable with: – Mankiw, G. N. : Macroeconomics, Worth Publishers, New York, 1992 (and subsequent editions) – Blanchard, O. : Macroeconomics, Prentice Hall, 1997 (and subsequent editions) – Burda, M. , Wyplosz, Ch. , Macroeconomics, A European Text, Oxford University Press, 2002 (or later editions) - always • Banking and financial markets – Mishkin, F. : The Economic of Money, Banking and Financial Markets, Pearson, Addison Wesley, 2007 (8 th edition, there is also a Czech translation of previous edition) • International Economics: – Krugman, P. , Obstfeld, M. , International Economics, Theory and Policy, Pearson, Addison and Wesley, 2006 All four books above will be an useful sidekick during the whole course Some insight into basic macroeconomic models useful as well

Literature to Lecture I Readings: • Burda, Wyplosz, Ch. I Data: • Maddison, A. : The World Economy, A Millennial Perspective, OECD, 2001 • Main sources • IMF (World Economic Outlook (www. imf. org/external/data) • Eurostat (http: //epp. eurostat. ec. europa. eu/portal/page/portal/statistics/t hemes) • Ameco, data base of the European Commission (http: //ec. europa. eu/economy_finance/db_indicators/ameco/ind ex_en. htm) • National Statistical Offices and Central Banks (ECB, FED, but also CNB) • In the US, also US Bureau of Labor Statistics