agec 340 – international economic development course slides for week 14 (april 13 & 15)...
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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
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Real U.S. GDP per year, 1947-2008(trillions of 2000 dollars, seasonally adjusted quarterly data )
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?
US data on incomeUS data on demand US data on supply
Click here for the latest figures:
How does macroeconomics matter for trade?
• What is “macroeconomics”, anyway?
• How would it enter our diagrams?
Our country (US) Rest of the world (ROW)Int’l. Trade
Q(tons)
Sexports
Dimports
Q(tons)
Q(thou. tons)
From week 3, the three-panel diagram…What if our currency falls in value? (e.g. more US$ per foreign currency)
More simply, from week 4’s “small country diagrams”, When our currency falls in value…
Pt
SDPrice($/unit) Pt
SD
An importable good An exportable good
How does agriculture fit in?
• “Devaluation” or “depreciation” of the currency helps producers of any tradable, whether exported or imported
• Agriculture is a major producer of tradables, using non-tradable land and labor; a low value of the currency helps farmers!
• But note that currency depreciation hurts most consumers, who are net buyers of tradable goods, and net sellers of non-tradables…
How has the U.S. exchange rate moved?
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90
100
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The Real Exchange Rate Facing U.S. Agriculture, 1970-2008
Note: Left scale is inverted, so a rise in the solid line is a decline in the value of the U.S. dollar. Source: Calculated from ERS/USDA data (www.ers.ursda.gov/data/macroeconomics;.
Real
Exch
ange
Rat
e (2
005=
100)
[fo
reig
n cu
rren
cy p
er U
S do
llar,
reve
rse
scal
e]
The exchange rate and farm income
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Real Exch. Rate (left scale, 2005=100)
Net Farm Income (right scale, 2000 US$)
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.
Real
Exch
ange
Rat
e (2
005=
100)
[fo
reig
n cu
rren
cy p
er U
S do
llar,
reve
rse
scal
e]
Real
Net
Far
m In
com
e (b
illio
ns o
f 200
0 U
S$)
Qty. of ag goods
Qty of other goods
We can think of this using a PPF and indifference curves
Foreigners are trading with us along the dashed line, at price = Pag/Pother
QsQd
exports
Gains from trade
Qty. of all tradable goods(e.g. farm products)
Qty of other goods (all non-tradables, e.g. most services)
Adding up all tradable goods on the X axis…
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)
Qty of other goods (all non-tradables, e.g. most services)
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.
Qs Qd
Gains from borrowing (but note losses if/when we have to pay back!)
…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
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