Category — MG4014

<rant>

I love getting emails, and I’m very good at responding to them quickly and efficiently.

I like getting text messages in large classes like EC4004, because it helps me interact with students more effectively.

I don’t like receiving emails as if they were text messages. Just now, a student sent me the following email:

Some of the slides that you used during the lecture today aren’t in the slides that were put up on Sulis. Are you going to put up an up-dated version of them?

This reminds me of an email I received a few years ago:

Hey wht cum up n exam? thx 

If you think this is the correct way to interact with a lecturer or anyone in a professional capacity, you need to think again.

Email etiquette is important, and will become more important as you move away from college into the workforce. Learn some.

Here’s a sample of the type of email I’d like to recieve:

Subject Line: I’d like you to do/say/write/explain something/meet me/clear something up/etc

Body: Hi Stephen,

I’m emailing you because….

Regards,

Jane Smith.

I won’t answer emails that aren’t written in a concise, respectful, professional manner. That’s my email policy.

In return, I promise to apply the same courtesy to you.

</rant>

BBC NEWS | In pictures: Urban life in Zimbabwe, Dollars and cents

Photos of urban life in Zimbabwe today: shortages, queues, hyperinflation, and hardship.

Blogged with Flock

Here is the distribution of marks for MG4014. Note all marks are subject to ratification by the Faculty Board.

MDU Macroeconomics Lecture 5: Inflation and Growth

Slides for the lecture are here

Or Watch the presentation here:

Today:

0. Defining Inflation

1. Inflation and the Business Cycle

2. Cyclical v. Structural Inflation

3. The Unemployment Trade off

4. Costly Inflation

5. Inflation and Inequality

6. Money Wages and Real Wages

7. Purchasing Power in Ireland

8. Inflation Targeting and Central Banks

0. Defining Inflation

Inflation is defined as a general increase in prices, which we proxy by the Consumer Price Index. (CPI). Deflation is  corresponding fall in the price level.

Ireland’s baseline inflation index looks like this for the last 30 years:

We can see the influence of the “Celtic Tiger” years on Irish Inflation, especially if we look at changes in Inflation over the period 1992-2006:

Broadly speaking, inflation is a reduction in purchasing power over time. So, each euro one earns will be worth less as it purchases less than it did before. There are many factors which can cause inflation to increase: wars, industrial conflicts, supply constraints, trade blockades, and more.

There are six main points to consider when talking about inflation (elaborating on Bowles et al, pg. 479).

1. Inflation and the Business Cycle

The level of inflation varies over the business cycle and between business cycles. So if we plot  Irish GDP and Inflation, over 1992-2006, we see this:

2. Cyclical v. Structural Inflation



We typically see more rapid inflation as we approach the top of the business cycle. This is called cyclical inflation.

Structural Inflation occurs when the price level increases uniformly through the whole of a business cycle, boom and bust. We can see this in sub sections of the consumer price index, for example in construction. Note, the index construction changed during this period. I’ll talk about what that means in the lecture, but you should be aware of it. Details of the indexation methodology are here.

3. The Unemployment Trade off

The Unemployment Trade off describes a tendency we observe during a business cycle for inflation to rise when unemployment falls. If we graph Inflation as measured by the CPI against Unemployment over a ten year period for Ireland and fit a straight line to the cloud of points we assemble, we see the following relationship. This graph is telling us the wrong thing, as I’ll explain in the lecture, but have a look at it for the moment to get the general idea. All data is from here.

4. Costly Inflation

Inflation is very costly because it makes economic outcomes more unpredictable. Economists say that the windfall effects of inflation are uncertain, and you can think of many reasons why that might be. There is also a cost to controlling inflation. For lots of information on this set of costs and how inflation is actually controlled, look here.

5. Inflation and Inequality

Each country’s mix of inflation and unemployment is both a product of and a determinant of that country’s income distribution. Data is from Nolan et al, pg. 17. Ireland’s Income distribution looks like this. approximately. See the paper linked to for a more nuanced picture and a more in depth analysis.

6. Money Wages and Real Wages

What you are paid each month is not what you can buy with that money. Your earnings are always determined by what you can purchase with them. The difference between your real wage (your wage taking inflation into account) and your nominal wage (what you see on your pay-slip) can sometimes make a real difference to what you can buy at the end of the month.

7. Purchasing Power in Ireland



Look at the table on page 489 of Bowles at al. We see the difference between the nominal wage (valued at 1982 $) and the real wage. We can see in each case a drop in purchasing power over the period from 1982-2002. For Ireland, we can compute the cost in today’s euros of purchasing 1 euros worth of goods in 1940. The change in purchasing power is staggering.

8. Inflation Targeting and Central Banks

The ECB is committed to inflation targeting. In the lecture we’ll discuss why this is and what effects it might have on your mortgage.

MDU Macroeconomics Lecture 5: Inflation and Growth

Slides for the lecture are here

Or Watch the presentation here:

Today:

0. Defining Inflation

1. Inflation and the Business Cycle

2. Cyclical v. Structural Inflation

3. The Unemployment Trade off

4. Costly Inflation

5. Inflation and Inequality

6. Money Wages and Real Wages

7. Purchasing Power in Ireland

8. Inflation Targeting and Central Banks

0. Defining Inflation

Inflation is defined as a general increase in prices, which we proxy by the Consumer Price Index. (CPI). Deflation is  corresponding fall in the price level.

Ireland’s baseline inflation index looks like this for the last 30 years:

We can see the influence of the “Celtic Tiger” years on Irish Inflation, especially if we look at changes in Inflation over the period 1992-2006:

Broadly speaking, inflation is a reduction in purchasing power over time. So, each euro one earns will be worth less as it purchases less than it did before. There are many factors which can cause inflation to increase: wars, industrial conflicts, supply constraints, trade blockades, and more.

There are six main points to consider when talking about inflation (elaborating on Bowles et al, pg. 479).

1. Inflation and the Business Cycle

The level of inflation varies over the business cycle and between business cycles. So if we plot  Irish GDP and Inflation, over 1992-2006, we see this:

2. Cyclical v. Structural Inflation



We typically see more rapid inflation as we approach the top of the business cycle. This is called cyclical inflation.

Structural Inflation occurs when the price level increases uniformly through the whole of a business cycle, boom and bust. We can see this in sub sections of the consumer price index, for example in construction. Note, the index construction changed during this period. I’ll talk about what that means in the lecture, but you should be aware of it. Details of the indexation methodology are here.

3. The Unemployment Trade off

The Unemployment Trade off describes a tendency we observe during a business cycle for inflation to rise when unemployment falls. If we graph Inflation as measured by the CPI against Unemployment over a ten year period for Ireland and fit a straight line to the cloud of points we assemble, we see the following relationship. This graph is telling us the wrong thing, as I’ll explain in the lecture, but have a look at it for the moment to get the general idea. All data is from here.

4. Costly Inflation

Inflation is very costly because it makes economic outcomes more unpredictable. Economists say that the windfall effects of inflation are uncertain, and you can think of many reasons why that might be. There is also a cost to controlling inflation. For lots of information on this set of costs and how inflation is actually controlled, look here.

5. Inflation and Inequality

Each country’s mix of inflation and unemployment is both a product of and a determinant of that country’s income distribution. Data is from Nolan et al, pg. 17. Ireland’s Income distribution looks like this. approximately. See the paper linked to for a more nuanced picture and a more in depth analysis.

6. Money Wages and Real Wages

What you are paid each month is not what you can buy with that money. Your earnings are always determined by what you can purchase with them. The difference between your real wage (your wage taking inflation into account) and your nominal wage (what you see on your pay-slip) can sometimes make a real difference to what you can buy at the end of the month.

7. Purchasing Power in Ireland



Look at the table on page 489 of Bowles at al. We see the difference between the nominal wage (valued at 1982 $) and the real wage. We can see in each case a drop in purchasing power over the period from 1982-2002. For Ireland, we can compute the cost in today’s euros of purchasing 1 euros worth of goods in 1940. The change in purchasing power is staggering.

8. Inflation Targeting and Central Banks

The ECB is committed to inflation targeting. In the lecture we’ll discuss why this is and what effects it might have on your mortgage.

Aggregate Supply and Demand

Download the slides here: asad.ppt

Or, watch them here:

Q1: Does a macroeconomic equilibrium exist?

Q2: If the answer to Q1 is true, then will this equilbrium generate full employment?

We’ve already talked about measuring total output, so revise your notes on GDP, GNI, etc.

Aggregate Supply:

The total supply of goods and services produced in the economy in a given period

AS = (net output per hour)*(total hours of employment) = yN

Aggregate Demand

AD is the total demand for goods and services in an economy in a given period.

AD = C+I

C = cwN

AD= C+I- cwN+I

Total Saving = wages saved + all profit income

= Nc(1-c)+N(y-w)

= Nw-Nwc+Ny-Nw

=Ny-Nwc

Market Clearing

AS = yN=cwN+I = AD

Unemployment and Government Fiscal Policy

AD = C+ I + B = cwN + I + B

AS = yN = cwN + I + B = AD

yN- cwN = I + B

N(y-cw) = I+B

so

N* = (I+B)/(y-cw)

this is the equation for the equilibrium level of employment when AS=AD in the product market.

Reading for this lecture: Bowles et al, pgs 445–476

Unemployment: the persistent macro economic problem. Why does unemployment exist? Why does it still exist?

More stylised facts:

1. High employment sustained over a few years will reduce profits. This is called the high-employment squeeze.

2. The availability of imports for an country’s goods place additional limits on the effectiveness of macro policies aimed at high employment.

3. Monetary policy and fiscal policy approaches to job creation are both effective and in different ways, and they may work at cross purposes.

4. Sustained high employment levels are possible, but we have to change the policy mix as we move through the business cycle.

Wage Push in Ireland

Materials Cost Push

> Housing CPI Cost push

Unit Cost, Output and the Profit Rate

(a bad reproduction of figure 17.4, pg. 456)

Exports and Imports: the Irish experience.

Lecture 3. Aggregate Demand and The Surplus Approach to Economics.

Reading: Bowles et al Chapter 16 pp 403—444

Watch the slideshow:

Download the Handout: MDU_macro_lecture3_handout.pdf

Today:

1                  Why are there unemployed resources in the economy?

2                  Introduction to business cycles

3                  Aggregate Supply and Demand

4                  Unemployment

5                  Income, Consumption, and Saving

6                  Unemployment and Government Fiscal Policy

7                  The Multiplier

8                  Yet another set of Stylised Facts

1.                Why are there unemployed resources in the economy?

The Great Depression really is the starting point for our analysis of aggregate demand and the stimulation of economic activity through fiscal policy. Read about it here. http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html.

The resources used in production are Land, Labour, Capital and Enterprise. At any moment, some of these resources are either not being used in their most efficient way (Ph.Ds sweeping streets) or not being used at all (Ph.Ds on the dole). Why, in an era of very tightly integrated capital markets globally and quite tightly integrated labour markets at least in some parts of the world, do unemployed resources exist? This is the subject of this lecture.

In the output lost in 2001 in the US economy, Bowles et al (pg 403) suggest that had the manufacturing resources of the US economy been fully utilised, an extra $1.2 trillion worth of good would have been produced. The output gap for Ireland from 1970–2005 is shown below

The figure below shows Ireland’s percentage deviation from it’s potential GDP from 1970 to 2005 compared with the USA (data for this figure came from http://www.imf.org/external/pubs/ft/weo/2000/02/data/ngap.csv).



What we see is striking. First, there is no discernible pattern to the individual fluctuations, though Ireland and the USA do track one another’s highs and lows, albeit in a lagged way. Second, the magnitude of each change is different for each country. This means each country experiences macroeconomic shocks differently. The canonical example is the http://en.wikipedia.org/wiki/1973_oil_crisis of the early 1970’s. Look at the graph for this period. What do we see? The countries experience an overall steep drop in deviations from potential, with Ireland experiencing a worse decrease than the USA. Third, in terms of the future from 2005, if you were to put a bet on, where would you say that line will go? Would you be confident about that assertion?

2. Introduction to Business Cycles.

Let’s look again at the Great Depression’s effect on output in the G7 (i.e. the richest) countries.

Here we can see a massive drop in output caused by a series of macro shocks.

First, let’s dispel a common misunderstanding. There are no such thing as business cycles. The word ‘cycle’ implies if you take a point on the graph of GDP against time, this point will reappear with the same frequency and amplitude a bit down the time line. This is of course not the case. If it were, and the economy did move in waves, then counteracting the effects of these waves would be simple: we would simply adjust our expectations, and hence our spending and saving patterns, to match the ebb and flow of that wave, were it so regular. No, there is no ‘cycle’ here, only fluctuations in output plus noise.

Actual vs. potential GDP here. This has implications for policy, depending on where we are in the business cycle.

Where do you think we are now?

3                  Aggregate Supply and Demand

Aggregate Demand is defined as the total demand for goods and services in the economy during a specific time period. It is often called effective demand. Find out more about the definition here.

Aggregate Supply is defined as the total supply of goods and services by a national economy during a specific time period. Find out more about the definition here.

4                  Unemployment

Unemployment refers to the numbers of workers actively seeking work but who cannot find work. The actual number of unemployed workers in Ireland is given by the Central Statistics Office, available here. Ireland hasn’t had a serious short term or long term (+12 months) unemployment problem in a long time, as we can see from the graphs below.

8    Growth Stylised Facts

From Kaldor, Kuznets, Romer, Lucas, Barro, Mankiw-Romer-Weil, and others.

1. In the short run, important fluctuations: output, employment, investment, and consumption vary across booms and recessions.

2. In the long run, so goes the story, we should see balanced growth: output per worker (Y/N) and capital per worker (K/L) grow at roughly constant rates (there is considerable disagreement about this statement, however). The return to capital (r), is roughly constant, though the real wage rate (w) can grow at the same rates as output. And the income shares of labour and capital (wL/Y and rK/Y) stay roughly constant.

3. Substantial cross-country differences in both income levels and growth rates.

4. Persistent differences versus conditional convergence.

5. Formal education. Highly correlated with high levels of income (obviously two-directional causality here); together with differences in saving rates can “explain” a fraction of the cross-country differences in output; this is an important predictor of high growth performance.

6. R&D and IT: These are the most powerful engines of growth (but obviously we’ll require more basic skills and education to take advantage of these first);

7. Government Policies: Taxation, infrastructure, inflation, law enforcement, property rights and corruption and important determinants of growth performance.

8. Democracy. An inverted U-shaped relation.

9. Openness. International trade and financial integration can promote growth.

10. Inequality. The Kuznet’s curve, an inverted U-shaped relation between income inequality and GDP per capita

11. Financial Markets and Risk Sharing.

12. Fertility. Higher fertility rates are correlated with lower levels of income and lower levels of economic growth. The Malthus curve, the Lewis model.

13. Structural transformation really mattes. This is the Theory of Transformational Growth.

14. Urbanisation over the long stretch of history really matters.

15. Institutional and social factors, e.g. Ireland’s history as a colony, existing social norms, etc.

Notes for MDU Macroeconomics Lectures

Lecture 1 Inequality

Read before the lecture: Bowles et al: Chapter 14, The Mosaic of Inequality, pg. 343–374

Plan for today:

• Defining inequality
• Classes
• Stylised facts
• Measuring Well-being and Inequality
• GDP
• Gini
• Unequal Chances

[Read more →]

Plan for today:

• Are we rich because they are poor?
• Does income distribution really matter?
• Some more stylised facts
• Poverty and progress: some international comparisons
• The Income distribution of the world over time.
• Productivity, surplus, and incentives.
• Download the lecture slide here by right clicking and choosing save target as:

Download MDU_macro_lecture2_pandpoverty-1.pdf

Update 07.02.07: I’ve checked all the links, and they should all work now. Email me if they don’t.

1 Are we rich because they are poor?

First, look at the gapminder progress and poverty presentation. The presentation is very nicely put together, and points out several stylised facts Bowles et al go through, starting on page 377:

2. Some More Stylised Facts

1. Around the world, living standards vary dramatically.

2. Culture and natural resources aside, one prominent difference between nations that succeed and those that do not is the composition and efficacy of their institutions governing competition in particular and the economy in generalNations that started the process of industrialisation (the UK, France, etc) had a distinct advantage over late comers. This is extremely well put in Lucas, 2000, Some Macroeconomics for the 21st Century, (you need to be on campus to read this link) which we’ll go through in class later.

3. Improvements in living standards are dependent on distribution of the surplus product which is produced by the combination of labour, capital goods, knowledge and improving technology. In the poor countries of the world, rapid technological progress can be achieved by adopting newer technologies.

4. Capitalism is an economic system that provides strong incentives to accumulate capital (duh) which is used to produce increases in the output of goods and services. The adoption of capitalism does not guarantee success, however.

5. Where the government plays an active role is supporting the economy’s growth, the country will, generally speaking, be better off.

6. International investment, which is the diversion of the surplus product from one country to another, can help make countries richer through these transfers.

3. Does income distribution really matter?

Well, lots of people seem to think so. There are two sides of the argument. One side says that income distribution doesn’t really matter in the broad sense of the word ‘matter’. Of course individuals experiencing the income differential are going to feel it matters, but at a societal level the existence of haves and have-nots is really not a cause for concern, one side maintains, because some people work harder, use their innate talents more effectively, are luckier, and so forth. For representative accounts of the latest developments in each position, click here and here. Piketty-Saez is the latest academic contribution from the data side of this argument.

The other side maintains that inequality is a social ill that needs to be curbed through progressive government policies like social insurance and other transfers to Have-nots from Haves. The argument is very well explained here. There are ample we resources on the debate on inequality in the links I’ve mentioned already if you want to get more into this area.

There are some really shocking numbers out there, for instance we have

The figure is one such measure of inequality - the ratio of the wealth of the richest 1% to that of a household with typical wealth in the middle. As the figure indicates, wealth inequality has not only persisted, but also grown much larger over time. The richest 1% of wealth holders had 125 times the wealth of the typical household in 1962; by 2004 they had 190 times as much or $14.8 million in wealth for the upper 1% compared to just $82,000 for the household in the middle fifth of wealth. (via)

4. Poverty and progress: some international comparisons



Ok, we’ll talk in class just how difficult a concept ‘poverty’ is to define. Check this list out for a subtle entrance to the debate on poverty and progress.

Given that poverty is such a badly defined concept (from a measurement point of view) we need to look at many different measures of this phenomenon to get an idea of what it means:

1. Global health inequalities: an international comparison, British Medical Journal

2. Water Poverty globally, (see pg. 15)

3. The World Bank development indicators, 2006, focus on income;

4. Total Fertility Rates by region, Table 2a here;

5. The Demographic Divide: Insert table 2j here;

6. Pages 379, 380, 381, 382 in Bowles et al.

We could, of course, go on ad infinitum. This is just a taster of the type of differences that exist in these areas.

5. The Income distribution of the world over time.

See http://www.gapminder.org/, focus on Income Distribution changes over time up to 2005.

6. Productivity, surplus, and incentives.

Ok, we’ve seen enough data to choke a small pony. Now let’s look at some economic explanations for the differences in incomes, wealth, etc.

First, let’s get a question in our heads we should try to be answering all the time:

Why have some countries done so well in terms of economic progress, while others have not?

We need a theoretical framework to help answer this questions. But first, a quick overview of theories of growth and distribution: Inequality and Economic Performance,  Francisco H.G. Ferreira.

And now let’s define our terms:

• Productivity

• Surplus

• Incentives

7. Capitalism and Unequal Development

The Lucas (2000) Model of Uneven development. The Race-Horse Metaphor.

8. Further Reading



On the Evolution of the World Income Distribution

Charles I. Jones

The Journal of Economic Perspectives, Vol. 11, No. 3. (Summer, 1997), pp. 19-36.

Inequality among World Citizens: 1820-1992

François Bourguignon; Christian Morrisson

The American Economic Review, Vol. 92, No. 4. (Sep., 2002), . 727-744.

1  Overview

Macroeconomics is the study of how the decisions of individuals, families, firms and governments produce outcomes, such as economic progress or stagnation, inflation or unemployment, for the economy as a whole. This course is about understanding macroeconomics in the context of the questions the discipline asks itself: how can we understand inequality in society? What does it mean for an economy to ‘grow’? Is such growth sustainable? This course will equip students with a framework for asking these questions.

1.1  Lecturer Details

I’m in AM068a, my number is 061 233611. Office hours are 12-1 Tuesdays or by appointment. Email me at stephen.kinsella@ul.ie if you wish to make an appointment.

2  Lecture Outline & Course Textbook

Lectures run from 21 Feb to 2 May. All lectures will be in room S116 in the Schumann building. They are 2 hours long and participatory. Slides used during the lectures and links mentioned will be provided during the lectures and online at http://www.stephenkinsella.net. All readings will be taken from Samuel Bowles, Richard Edwards, and Frank Roosevelt, Understanding Capitalism: Command, Competition, and Change, Oxford University Press, 2005. Here is a link to the OUP site for the book: http://www.oup.com/uk/catalogue/?ci=9780195138658.