MACROECONOMIC POLICY IN THE ASIA-

PACIFICGECO6400

ECONOMIC GROWTHMACROECONOMIC POLICY CHALLENGESCOURSE REVISION

ECONOMIC GROWTH

The Asia-Pacific region consists of economic systems that range from free market to centrally planned.

Free market-based capitalist economies experience regular periodic fluctuations in the production of output.

Such fluctuations are often referred to as business cycles.

COUNTRY ECONOMIC SYSTEM

RESOURCE OWNERSHIP

AustraliaChinaHong KongIndiaIndonesiaJapanMalaysiaNew ZealandPhilippinesSingaporeSouth KoreaTaiwanThailandVietnam

Free marketCentrally PlannedFree MarketMixedFree marketFree marketMixedFree marketFree MarketFree MarketFree MarketFree MarketFree MarketFree Market

PrivateStatePrivateState and PrivatePrivatePrivatePrivatePrivatePrivatePrivatePrivatePrivatePrivatePrivate

ECONOMIC GROWTH

ECONOMIC GROWTH

The Business CycleThe Business CycleThe business cycle refers to the irregular fluctuation of real output in a capitalist economy over a period of time.

This fluctuation tends to be wave-like and consists of 4 recurring phases:PeakRecessionTroughRecovery

Time

Change in GDP

PEAK

TROUGH

RECESSION

RECOVERY

Wavelength

Amplitude

ECONOMIC GROWTH

ECONOMIC GROWTH

PhasesPhasesRepetitive aspects of the cycle.

Peak: economic activity reaches a maximum

Recession: decline in economic activity

Trough: economic activity reaches a minimum

Recovery: increase in economic activity.

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CausesCausesWhat turns the cycle?

Man-madePoliticalTechnological

NaturalDisastersDiscovery

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CharacteristicsCharacteristicsHow to determine what phase of the cycle

predominates. Output Employment Inflation Aggregate Demand

ConsumptionInvestmentExports and imports

MechanismsMechanismsWhat keeps the cycle going? Aggregate Expenditure

Consumption Investment Exports

Expectations

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ECONOMIC GROWTH

PHASE POSSIBLE CAUSES CHARACTERISTICS

PEAK

High outputLow unemploymentHigh pricesHigh Aggregate demand

RECESSION

Natural disasterWar

Declining outputRising unemploymentFalling pricesDecreasing aggregate demand

TROUGH

Low outputHigh unemploymentLow pricesLow Aggregate demand

RECOVERY

Breaking of a droughtDiscovery of new technologyInnovation

Rising outputDeclining unemploymentRising pricesRising Aggregate demand

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Source: Patnaik, Ila and Rachna Sharma, ‘Business Cycles in the Indian Economy’, Margin, Vol.35, No.1, pp.71-79, October-December 2002.

ECONOMIC GROWTH

Class TaskClass TaskFind one complete business cycle and provide years for:PeakRecessionTroughRecovery

Discuss any macroeconomic problems associated with the phases of the cycle and suggest policies to alleviate them.

MACROECONOMIC POLICY CHALLENGES

OverviewOverviewEconomic integration in the Asia-Pacific region has been advancing rapidly over the past decade, driven by growing intra-regional trade, increasing investment and financial integration.

Based on regional and bilateral free-trade agreements as well as emerging financial cooperation arrangements, this process is likely to increase over time.

Reflecting increasing trade and investment flows, business cycles across countries in the region are becoming more correlated.

ChallengesChallenges1.Development and integration of

different economic systems

2.Managing growth and development Infrastructure development Structural reform Climate change Ageing population Income distribution

MACROECONOMIC POLICY CHALLENGES

4. Global Integration Trade Policies

open vs closed global vs regional and multilateral vs bilateral

Capital Markets Regulation of international capital flows Financial system regulation Exchange rate systems

5. Balance of development Distribution of gains between economies

MACROECONOMIC POLICY CHALLENGES

THE MACROECONOMYTHE MACROECONOMY The Economic Problem The Circular Flow of Income Economic Sectors Measuring Output: GDP, methods,

nominal and real, alternative measures of economic welfare (HDI, GPI).

COURSE REVISION

MEASURING EMPLOYMENT AND MEASURING EMPLOYMENT AND INFLATIONINFLATION

Defining and measuring unemployment Unemployment rate, Participation rate Types of unemployment Discouraged workers Defining and measuring inflation Costs of inflation The Philips Curve

COURSE REVISION

MACROECONOMIC MODELSMACROECONOMIC MODELS Aggregate Expenditure Model Economic sectors AE=C+I+G+(X-M) 45-degree line diagram MPC and MPS, APC and APS Equilibrium Income (Y=AE) Multiplier

COURSE REVISION

MACROECONOMIC MODELSMACROECONOMIC MODELS Aggregate Demand and Aggregate Supply Aggregate Demand Aggregate Supply: short-run and long-run Movements along vs shifts Equilibrium Application of AD-AS model: inflation,

Stagflation

COURSE REVISION

FISCAL POLICYFISCAL POLICY Federal Budget Outcome Financing a Budget Deficit Discretionary and non-discretionary Fiscal

Policy Automatic Stabilisers Fiscal Policy transmission mechanism Crowding Out Net export effect Problems with Fiscal Policy

COURSE REVISION

MONEY AND BANKINGMONEY AND BANKING Defining money Money Demand and Money Supply Credit creation: reserves, reserve ratio

MONETARY POLICYMONETARY POLICY Open Market Operations Monetary Policy transmission mechanism Monetary Policy, interest rates and

exchange rates Second-round effects of Monetary Policy

COURSE REVISION

INTERNATIONAL TRADE AND THE INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTSBALANCE OF PAYMENTSCurrent Account: Current Account DeficitCapital and Financial AccountTerms of TradeForeign DebtTwin Deficits

COURSE REVISION

EXCHANGE RATESEXCHANGE RATES Definition and determination Exchange rate systems

Flexible Managed Fixedinterest rates and exchange ratesPurchasing Power Parity

COURSE REVISION

ECONOMIC GROWTHECONOMIC GROWTH Business Cycles

COURSE REVISION