Economic Environment Analysis

Ace Institute of Management Executive MBA Program

Session 2: Goals of Macroeconomic Policies

Instructor Sandeep Basnyat Sandeep_basnyat@yahoo.com 9841 892281

Goals of Macroeconomic Policies

Usually three policy goals: 1. The Goal of Economic Growth 2. The Goal of low unemployment 3. The Goal of Low Inflation

The Goal of Economic Growth

Growth rate across the World (Source: IMF, 2010)

Rank 1 2 3 4 5 6 7 8 9 10 Country Qatar Paraguay Singapore Taiwan India People's Republic of China Turkmenistan Argentina Sri Lanka Congo, Republic of Rate 16.272 15.270 14.400000 10.823 10.365 10.300 9.222 9.161 9.134 9.090

5 Fastest growing in Asia (Source: IMF 2010)

Country Singapore Taiwan India Date of % Growth World Rank information 14.5% 10.8% 10.4% 2010 2010 2010 3 4 5 Region Rank 1 2 3

China
Sri Lanka

10.3%
9.1%

2010
2010

6
9

4
5

Growth rate of other countries (Source: IMF 2010)

Afghanistan Maldives Philippines Vietnam Indonesia Mexico Nepal USA Switzerland 8.2 7.9 7.6 6.7 6.1 5.5 4.5 2.83 2.5 Ethiopia Thailand Malaysia South Korea Bangladesh Pakistan Canada Australia 8.8 7.8 7.1 6.1 6.02 4.79 3.07 2.74

What determines the economic growth rate?

Productivity of Labour and Capital Productivity = GDP (Output) / Total Hours of works Productivity is the Output per hour of work.

What determines the capacity of workers to produce?

A production function shows the relationship between the quantity of inputs used to produce a good, and the quantity of output of that good. It can be represented by a table, equation, or graph.

Simple Example: Production Function

L Q (bushels
Quantity of output
3,000

(no. of of wheat) workers)

2,500
2,000 1,500 1,000 500 0 0 1 2 3 4 5

0 1 2

0 1000 1800

3
4 5

2400
2800 3000

No. of workers

Effect of Better Technology

Effect of Increased Capital

The Goal of Low Unemployment

U.S. unemployment rate

(% of labor force)
30

Very high Unemployment

25 20 15 10 5 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Categories of the population

employed working at a paid job unemployed not employed but looking for a job labor force the amount of labor available for producing goods and services; all employed plus unemployed persons not in the labor force not employed, not looking for work

Two important labor force concepts

unemployment rate percentage of the labor force that is unemployed labor force participation rate the fraction of the adult population that participates in the labor force

Types of Unemployment
Frictional Unemployment
Unemployment due to time gaps between job searching and finding

Structural Unemployment
Unemployment due to shift in industrial structure

Cyclical Unemployment
Unemployment due to change in business cycle

The Goal of Low Inflation

Inflation: Sustained increase in overall price level Deteriorates the purchasing power of people Nominal and Real wages Real wage Rate = Nominal wage / Price Level

Costs of Inflation
INFLATION AS A REDISTRIBUTOR OF INCOME AND WEALTH: 3 Concepts Those who lend money are often victimized by inflation. Borrowers often gain from inflation. Inflation does not systematically steal from the rich to aid the poor, nor does it always do the reverse.

Costs of Inflation Inflation and Interest Rates

Nominal and Real Interest Rates Nominal Interest Rate = Real Interest Rate + Expected Inflation Rate

Malfunctioning with Tax Calculation

Other Costs of Inflation

Shoe Leather Costs Menu Costs

Thank You