Business and Economic Analysis 7. Macroeconomic Forces 7.1. The Circular Flow 7.2. Macroeconomics 7.3. Macroeconomic Failures 7.3.1.Unemployment 7.3.2. Inflation 7.3.3. The Business Cycle 7.3.4. Inequality 7.4. Economic Data
7.1. The Circular Flow The (closed) economy Expenditure approach Markets for goods & services Spending Goods & services bought Goods & services sold Output approach Households Government Income Labour, land & capital Inputs for production Income approach Markets for the FOPs Wages, rent & profit The (open) economy Revenue Imports Firms Rest of the World Exports 2
7.2. Macroeconomics: Definition Definition: Macroeconomics is the branch of economics that studies the performance of the economy as a whole at the national, regional and global levels resulting from the interactions between individuals, firms and government. Economics Micro Macro examines allocating decisions at the level of individual firms, consumers, in markets, industries efficiency is treated as static dynamic economy (aggregate), nations, regions and world government intervention is the exception rule economists disagree a little (positive economics) a lot (normative economics) the economist is like an engineer a physician 3
7.2. Macroeconomics: GDP Definitions: Economic growth is the the annual % increase of the Gross Domestic Product (GDP), the value of goods and service produced within a country. Goals Economic growth w/o: Inflation Unemployment Business cycle Excessive Inequality Imbalanced trade World GDP 8E+13 2E+13 Policy tools fiscal (spending, taxation) monetary (interest rates, money supply) legal (nationalisation, regulation) trade (tariffs, quotas, exchange rates) GDP of Selected Countries GDP 6E+13 4E+13 GDP 1.5E+13 1E+13 PRC AUS USA IND 2E+13 5E+12 E+ E+ 196 1966 1972 1978 1984 199 1996 22 28 214 Page of 196 15 1966 1972 1978 1984 199 1996 22 28 214
7.2. Macroeconomics: GDP 6 GDP Per Capita of Selected Countries GDP per capita 45 3 15 WORLD AUS USA IND PRC 196 1966 1972 1978 1984 199 1996 22 28 214
7.2. Macroeconomics: GDP The West $39,342 former USSR $12,392 Muslim World $18,335 South Asia $3,23 Liberalising Asia $3,21 Tiger economies $38,345 Latin America $8,834 Sub-Saharan Africa $2,528 Austronesian nations $7,251 Per capita GDP across the world 211 (http://data.worldbank.org) Per capita GDP is different across regions of the world (ANOVA p=.) and higher in Western and Tiger nations compared with other regions (t-test p=.).
7.3. Macroeconomic Failures: Unemployment Australia, 21st century In the USA, unemployment rose from 3% to 25% between 1929 and 1933. Unemployment in Germany in 1932: 3%
7.3.1. Macroeconomic Failures: Unemployment Definition: Unemployment is the rate of people of working age without work, but willing and able to work at current wages. w Costs of unemployment Personal Welfare loss (total surplus) Government loss (tax revenue and benefits) De-skilling Negative externalities Unemployment Q L Q L 1 S L D L 12 1 8 6 4 2 AUS USA Unemployment (% of the labour force) 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213
7.3.2. Macroeconomic Failures: Inflation Hyperinflation in Zimbabwe reached a rate of at 79,6,,% per month in November 28. The value of paper money evaporated so quickly that some companies paid employees in late morning so they could rush off and spend their wages at lunchtime. Wives waited at their husbands factories on payday so they could hurry to the stores. One man ordered a coffee but its price had doubled by the time it arrived at his table. It was not uncommon to see shoppers hauling buckets, bags, even wheelbarrows full of banknotes. One Munich woman dragged a suitcase of banknotes to her local grocery store; she left it outside briefly, where someone stole the suitcase after emptying the money onto the street. Children used worthless banknotes as toys; their mothers used them to light stoves, line cake tins, even as wallpaper. Many Germans abandoned money altogether and began bartering as a means of obtaining what they needed (alphahistory.com).
7.3.2. Macroeconomic Failures: Inflation Definition: Inflation is the annual % increase in overall (consumer) price level. 16 Costs of inflation Redistribution Uncertainty Transaction (shoe leather and menu) cost Balance of trade (export prices rise) Deflationary policies and lower growth 12 8 4 AUS USA 196 1963 1966 1969 1972 1975 1978 1981 1984 1987 199 1993 Page 1996 1999 of 1522 25 28 211 214 1
7.3.3. Macroeconomic Failures: The Business Cycle Definition: The business cycle consists of cyclical movements of macroeconomic performance (e.g. output and employment) around a long-term trend. GDP Peak Expansion Peak Recession Costs of the business cycle Uncertainty and transactions cost Costs of recession Lower growth Expansion Peak Recession Expansion Trough Recession Trough Time 11
7.3.4. Macroeconomic Failures: Inequality Definition: Economic inequality is how unequal national wealth is distributed or the the difference in income or wealth between different individuals in an economy. 65 6 55 5 45 4 35 3 25 2 15 1 5 S Africa Brazil Chile Mexico Argentina Gini Coefficient for selected Countries China Russia USA Turkey Vietnam Bhutan Indonesia India Australia France UK Japan S Korea Egypt Germany Pakistan Sweden Norway % of wealth % of wealth Brazil 7 53 35 18 top 2% 6-8 is owned by the Australia 7 53 35 18 top 2% 6-8 is owned by the
7.3.4. Macroeconomic Failures: Inequality Wilkinson and Pickett, The Spirit Level: Why equality is better for everyone Poverty has negative externalities. Nations with high levels of income inequality are associated with social ills including low life expectance, mental and physical health, social mobility, educational performance, high teenage pregnancy, homicide, imprisonment.
7.4. Economic Data: Types and Display Economic data are sets of numbers that represent information about economic phenomena. Types of data scale (e.g. income, price, quantity) ordinal (which market structure) nominal (which country, industry) They can be used to examine variability cross sectoral (industries, countries) over time (time series) both (panel data) 1 75 5 25 Displaying data bar chart means of different groups 4 line chart time series data 2 histogram distribution of occurrences pie chart percentage shares of total 43. 32.25 scatter diagram relationship between 2 variables 21.5 17 55 26 53 43 7 27 29 96 58 2 25 21 215 1.75. 1-1 21-3 41-5 61-7 Summary statistics Mean Sum of all observations/their number Median mid-point of distribution Mode most frequently occurring observation Variance dispersion of observations from mean Standard Dev dispersion of observations from mean Minimum lowest occurring observation Maximum highest occurring observation 14 18. 13.5 9. 4.5. 7% 8% 1% 11% 29% 35% 5 1 15 2
7.4. Economic Data: Analysis Definition: Econometrics is the empirical verification of economic laws through the application of statistics to economic data. Macroeconomists use it to measure the effects of economic policy at the aggregate level. Econometric Analysis identifying relevant variables and their proxies collecting data (observation, survey, experiment) data input and organisation display data summary statistics statistical data analysis and testing Data can be analysed for difference (t-test) correlation (correlation coefficient) linear dependence (regression) Definition: Correlation is the strength of the linear relationship between two variables X and Y. Positive Correlation No Correlation Negative Correlation strong moderate weak weak moderate strong >.5.3 to.49.1 to.29 -.1 to.29 -.3 to -.49 <-.5
Seminar 7 Please proceed to the computer laboratory next door, start up a computer and log yourself in with your RMIT credentials. Next, download the file from http://www.busecon.co.uk/econ/bea/slides/lecture7.xlsx and open it in Excel. The seminar questions are contained in the file. It is assumed you have read the case study 7: Happiness is a Growing Economy? on the website. 16