An Overview of Macroeconomic Policy

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An Overview of Macroeconomic Policy

• Class One
• Economic Policy in Canada
• POL 4130

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Public Policy ChallengesThe Personal Baggage

• Globalization
• The world is interdependent imposes constraints
  on range of choices available to policy-makers
• Shifts in Political Culture
• Canadians expectations about policy supply
  displays changes over time impact on
  macro-economy
• Compare Canada with developments in Germany of
  France for example
• New Ideas about Governance and Public Management
• Ethics, Roles of Market, Bureaucracy and
  Politicians

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National Accounting and GDP

• Macroeconomics What is It?
• Demand Supply
• Some National Accounting Identities
• Estimating Output
• Major Categories of Demand in the national economy

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What is Macroeconomics?

• The analysis of interactions among the principal
  parts of the economy
• C I G X M (the Keynesian equation)
• The principal actors are consumers (c), investors
  (i), the government (g) and the external sector
  (x-m)
• GDP C I G X M (the nation total output)

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Real Gross Domestic Product http//www.bankofcana
da.ca/en/mpr/pdf/mprjul08.pdf
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What Affects GDP?Not all under control of
national government

• Tax policy (consumers, investors)
• Central Bank policy (interest rates, exchange
  rate, inflation)
• Other government polices (subsidies, regulation)
• Production capacity (modern or antiquated)
• Policy in other countries (mainly the US but also
  Euro area and Asia)
• International shocks (e.g., wars, oil prices,
  other commodity prices)

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Tax policyhttp//www.fin.gc.ca/budget06/pdf/bp200
6e.pdf
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Central Bank Policy I90 day commercial paper
ratewww.bankofcanada.ca/en/graphs/V122491-gr.html

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Central Bank Policy IIKey Policy Indicators

• Inflation Control Target CPI
• Policy Instrument Overnight Interest Rate
• Monetary Conditions Exchange Rate 90-day
  commercial paper rate
• Monetary Aggregates M1, M2
• Inflation Indicators CPI, Labor Costs,
  wholesale prices

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Regulation and Subsidies

• Regulation (Deregulation)
• Financial Services
• Telecom
• Broadcasting
• Question why?
• Subsidies
• Agriculture
• Public Transport
• Environment
• Why subsidies?

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Production Capacity
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External Shocks
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Developments Offshorehttp//www.bankofcanada.ca/e
n/mpr/pdf/mprjul08.pdf
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Four Principles Affecting GDP(There could be
more!)

• Up to the limits of a nations potential output
  capacity to produce) firms in aggregate will
  produce to meet demand.
• Aggregate demand can fluctuate rather sharply
  from year-to-year
• Successful economic performance in SR depends on
  how well a nation avoids large fluctuations in
  demand
• In LR economic well-being depends on how well a
  nation increases the supply of goods and services

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Demand and Supply Policies I

• To increase aggregate demand
• Cut taxes
• Government spending
• Monetary and credit expansion
• Increase social safety net payments
• Outcomes
• If at potential gt inflation
• If below potential gt aggregate demand rises

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Demand and Supply Policies II

• To raise aggregate supply
• Government can spend more money for investment in
  education, roads, R D
• Other projects that enhance a nations ability to
  produce
• Reduction in taxes
• Improve monetary incentives to work more or to
  take risks
• Depending on economic conjuncture the monetary
  authorities may want to take offsetting measures
• Labor Market Policies

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Demand and Supply Policies III

• Aggregate demand policy aims to change the level
  of GDP
• Frequently aggregate supply policy has to achieve
  its objective by changing the composition of GDP
  increase the capacity of the economy to produce

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National AccountingSome Identities

• For every dollar of output produced there is a
  dollar of wage, profit or some other kind of
  income produced
• Total amount that a country invests at home and
  abroad can never exceed the amount that it saves
• A balance of payments deficit (imports gt exports)
  will always equal the excess of domestic
  investment over savings
• A balance of payments surplus (exports gt imports)
  means excess of savings over domestic investment

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GDP -gt Income Expenditure
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GDP -gt Income Expenditure
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GNP vs. GDP

• GNP includes the net interest and dividends
  earned by residents and corporations from
  investments abroad. GDP excludes this.
• Thus, GNP is output produced by residents of a
  country
• And, GDP is the output produced within a country

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Estimating GDP I

• Goods and services included are those valued by
  the market
• Only goods and services bought and sold in the
  market are included
• Another measure of output eliminates the effects
  of inflation real GDP vs. nominal GDP

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Estimating GDP II

• Nominal GDP PGDP x Real GDP
• P Nominal GDP / Real GDP
• Real GDP Nominal GDP / PGDP
• PGDP the GDP price deflator

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Estimating GDP IIIReal vs. Nominal

• GDP can increase if the nation produces a larger
  physical quantity of G S. Such a change would
  be important to the standard of living
• GDP can also change because the prices of G S
  rise (inflation). GDP not physically larger
• Thus need some way to distinguish between a
  physical change (which affects the standard of
  living) and a nominal change in total output

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Real GDP Q/Q _at_ AR
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PGDP vs. CPI

• The CPI (consumer price index) measures the price
  of a bundle of G S based on a survey of
  consumer expenditures
• CPI Current cost of a bundle of goods
  services / base year costs of the bundle x 100
• The GDP deflator (PGDP) includes prices of all
  output
• The CPI incorporates prices of imports which are
  excluded from the GDP deflator
• The GDP deflator allows the output basket to
  change each year the CPI basket changes at
  discrete intervals

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Major Categories of GDP I

• Consumption
• Durables
• Semi-durables
• Non-durables
• Services
• Investment
• Machinery Equipment
• Non-residential construction
• Increases supply by adding to productive capacity
  of the economy
• Housing

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Major Categories of GDP II

• Government
• Current consumption
• Investment
• Exports
• Imports
• Change in inventories