recitationreviewv2

Agenda : Agenda CHILLCHILLCHILLCHILLCHILL Review CHILLCHILLCHILLCHILLCHILL


The German Hyperinflation –Part 1 : The German Hyperinflation –Part 1 Microeconomics vs. Macroeconomics Quantitative and precise Lots of theories to explain trends Quantity Theory of Money MV = P(Q) (T), Assume M is constant During inflation V increases (so P increases) During deflation V decreases (so P decreases)


The German Hyperinflation – Part 2 : The German Hyperinflation – Part 2 How to Stop Inflation Fiscal Policy – Raise taxes, cut spending Monetary Policy – Shrink money supply, raise interest rates (i) How to Stop Hyperinflation Fiscal Policy and Monetary Policy don’t work Need some symbolic gesture to restore confidence in currency Random Note on Inflation Inflation is not bad or good, people just think it is bad


The Great Depression – Part 1 : The Great Depression – Part 1 Deflation Deflation is bad Always wait to make a purchase By holding cash you decrease V Real interest rates and real value of debt increase Real wages increase Cause of Depression Bank failure – like runaway inflation has to do with a loss of confidence Cure for Depression Monetary policy does not work during deflation, the only way to battle persistent deflation is through a massive fiscal stimulus – government spending is better than a tax cut


The Great Depression – Part 2 : The Great Depression – Part 2 Make sure you know what each variable below means and how it changes: Y = C + I + G + (X-M) Be aware of the multiplier and investment accelerator


The Reagan Plan : The Reagan Plan Phillips Curve Theory that inflation and unemployment are inversely related. Mostly true, but in true macroeconomic fashion can’t explain everything Crowding Out S-I = (X-M) + (G-T) trade deficit gov’t budget deficit If X-M = 0 and G-T = 0, you only invest what you save If you run a trade deficit (XT ), you must invest less than savings


Singapore : Singapore Productivity Easy way to measure: output/hours Correct way to measure: output/index of inputs (cap., lab.,Natural Resources ) Complicated equation simplified: Output = KαLβ a+b=1 constant returns to scale Just think about capital intensive ( European Ski slopes ) or labor intensive ( agriculture in most countries ) Steps 1 and 2 in developing countries: 1) Mobilize resources (capital or labor) 2) Invest in skills and education


Chile – Part 1 : Chile – Part 1 Comparative Advantage How efficiently you produce one product compared to another product. Key point is that with CA trade almost always improves efficiency. Exchange Rates


Chile – Part 2 : Chile – Part 2 Solution for Chilean problem 1) Privatize 2) De-Regulate 3) Run a budget surplus What are these two items? 4) Set up a Provident Fund 5) Free up trade 6) Free up exchange rate


Mexico – Part 1 : Mexico – Part 1 What do you do when are running out of foreign exchange reserves? 1) Let currency float 2) Raise interest rates to entice savings back in (reduces investment in ST) 3) Increase government budget surplus (gov’t is increasing capital supply) 4) Tight monetary policy (#2) and fiscal policy (#3) drive you into a recession, you can’t afford imports, and you correct your balance of payments


Mexico – Part 2 : Mexico – Part 2 Anatomy of a crisis 1. Unsustainability (asset price bubble, BOP deficit, etc.) 2. Cannot and will not last 3. Time and Trigger unknown 4. Insiders will run first 5. Asset prices will fall 6. Collateral melts because of #5 7. Good loans default because of #6 Æ banks call loans 8. Banks will stop rolling over loans 9. Supplier credit disappears 10. Wealthy people will leave Æ value of currency decreasesÆ real debts increases Æ more firms default and go broke


Asian Crisis – Part 1 : Asian Crisis – Part 1 Exchange Rate Systems Least Flexible – Dollarization Currency board Fixed exchange rate Crawling peg Dirty flexible rate Clean flexible rates Depreciation = Market lowers value of currency Devaluation = Government lowers value of currency that they were trying to hold fixed


Asian Crisis – Part 2 : Asian Crisis – Part 2 Strategy for Asian countries Japan has highly skilled workforce and a lot of technology China has a huge, inexpensive labor force Strategy #1- Go upscale and try to do technology (have to compete with Japan) Strategy #2- Lower wages (have to compete with China)\ Strategy #1 probably trumps #2, China will force 3rd world countries to go for import substitution


Argentina : Argentina Use as review case


Russia : Russia Capitalism is hard to start (even in a developed country) 1. Must go down before you go up 2. Property rights must be set up (people usually get killed over this) 3. Need a legal system and a system to enforce laws 4. Need a tax system 5. Need a banking system 6. Need a social welfare system 7. Need an accounting system 8. Need infrastructure When transitioning from communism, you need to generate both sides of a trade, since the government was always the buyer or seller before


China : China What was their strategy 1. Mobilized Labor 2. Focused on exports (Japanese model) 1. Foreign companies invest in China and export products to rest of world (these guys make money) 2. Foreign companies invest in China and sell product in China (these guys hope to build a brand and make money in 20+ years) Random Notes 1. Don’t always believe the #s, check the source and look for consistency in the data 2. Electricity grows @ 1.1X GDP


Uganda : Uganda Checklist for developing countries 1. Mobilize resources 2. Invest in skills (education) 3. Invest in infrastructure 4. Develop technology Problem here is that before you can even do #1 you need to be organized


European Monetary Union : European Monetary Union Free trade areas versus common markets All free trade areas collapse. Why? 1. You get a crisis and it is easy to defect 2. Leveling down 3. Only goods move, not labor EU common market: Works because participants were all roughly equal going in Harmonization: Safety, taxes, health&environment, labor market Current issue: widening vs. deepening Try to apply lessons from EU to other trade zones and agreements


France – Unemployment – Part 1 : France – Unemployment – Part 1 3 Easy ways to reduce unemployment 1. Set monetary and fiscal policy to stimulate demand 2. Reduce the labor supply 3. Lower wages Thurow’s solution Cut payroll tax to zero (which of the above 3 ways is this?) Increase the VAT to make up the shortfall Factor Price Equalization Companies move production facilities to achieve the lowest possible cost of factor inputs If countries want the companies back then factor prices must adjust (e.g. wages decline)


France – Unemployment – Part 2 : France – Unemployment – Part 2 EU vs. US in terms of factor inputs EU is a capital intensive system US is a labor intensive system Labor market flexibility (LMF) With limited LMF small companies cannot grow big (they can’t survive the inevitable downturns in the economy) Role of unemployment 1. Lower wages 2. Forces people to move


Japan : Japan Post WWII 1. Mobilized capital 2. Organized labor 3. Purchased technology 4. Strategy of follow the leader (US) 5. Government controlled banking system directing investment 6. Export-led model Why can’t they clean up the current mess? Won’t admit failure, no rules for bankruptcy, don’t send people to jail, haven’t felt enough pain, bureaucracy, labor market inflexibility, fiscal stimulus too small (need massive) and no more monetary policy possible since i= 0


Globalization : Globalization Over time there will be no more corporate taxes, countries will start paying companies to locate there Problem with globalization Race to the bottom (similar to leveling down) Issues with globalization Environment Labor standards(child labor, safety, etc.) Local culture Health Intellectual Property Rights Income inequality Random notes superior vs. inferior goods, crisis of the common


Wage Inequality : Wage Inequality Wage inequality comes with capitalism Possible explanations for wage inequality 1. Inheritance 2. Hard to lose all of your wealth 3. Winner takes all 4. Bureaucracy 5. Compounding of talents 7. Luck Why doesn’t the system collapse? People who have a lot of money give money back to those who don’t