...Q1: A- GDP is used to measure the wealth and prosperity of nations in addition to that it measure the overall growth or decline of a nation's economy. The most common way to measure GDP is the expenditure approach. GDP in expenditure approach is the sum of the following elements: Total domestic consumption:This is the total amount spent on domestically produced services and final goods whether it was tangible such as food and clothing or intangible such as doctor fees and cleaning. Total domestic investment expenditures:This measurement includes investments in stocks and bonds in addition to the investments in equipment such as computer servers and commercial buildings that will be useful over a long period of time. Government expenditures:such as military salaries and building roads, however it does not include social security payments and welfare. Net exports: where it is the total of goods produced domestically and sold to foreigners minus goods produced by foreigners and sold domestically. Regarding to above, using GDP as a measure of a nation's economy is quite good because it measures the nation buying power over a given time period. Moreover, GDP can be used as an indicator of a nation's overall standard of living where nation's standard of living increases as GDP increases. However, there are a number of shortcomings to using GDP. Firstly,GDP is computed at market prices which means that it ignores externalities such as environmental...
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...Is the assumption of rational expectations sufficient to ensure policy neutrality? Expectations play a vital role in determining the behaviour of the economy. How agents respond to a policy decision is critical to understanding the size and direction of the economy. For example agents make decisions to buy/sell stocks depending on their expectations of future profits or future interest rates. Therefore policy makers should take into account the expectations of people who make choices that affect future outcomes. In addition to agents’ expectations of future, we need to consider what information is available to the agent and based on what kind of knowledge does the agent make a decision at the first period (t). Previously economists modelled expectations on recent past information available to agents which the agents than used to adapt to the current situation; this form of adaptive expectations behaviour means that agents learn from past experience to expect future event, which means that adaptive expectations will be useful when future events are the same as past. Let’s look at a simple example of adaptive expectations (AE) first to lay the foundation for the other important and more relevant assumption of rational expectations (RE). If we had an inflation rate today of 3%, agents who use AE will forecast that next period’s inflation rate as 3%. So, with this basic example of AE we would have π ’ π t − 1 Where inflation expected is equal to the lagged inflation rate....
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...Introduction This essay will explain how economists establish if the economy of a country is in recession or not. The essay will also analyse and review various policy tools that are often used by the government to guard against recession or to reduce the impacts of recession on the economy and the people. The essay will be divided into two parts. In the first part, the meaning of recession will be provided and why recession can be considered as an economic problem will be explained. Also, the first part will explain how the strength and depth of recession can be measured. The second part of this essay will explain various economic policy tools that government often use to make sure that economy of a country grows. Part 1 Recession is defined as a condition whereby a country experiences temporary economic decline, during which time the trade and industrial activities in the country are reduced; and the Gross Domestic Product (GDP) of the country fall in two successive quarters (Arnold, 2014). A recession can also be said to have occurred if there is a big reduction in the economic activity of a country, and this last longer than few months (Arnold, 2014). When there is a recession in a country, there will be a fall in the country’s industrial production, employment, real income and wholesale –retail trade (Arnold, 2014). This means that recession often has negative effects on the economy of a country and that recession can lead to unemployment for people and lack of profits...
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...Travelling Along the Third Way. A Swedish Model of Stabilisation, Equity and Growth* Lennart Erixon ♣ (December, 2005) Department of Economics, Stockholm University, 106 91 Stockholm, Sweden _____________________________________________________________________ Abstract The Swedish economic policy to combine full employment and equity with price stability and economic growth was developed by two trade union economists shortly after World War II. Through the use of extensive employment policy measures, a tight fiscal policy and a wage policy of solidarity, the Rehn-Meidner model represents a unique third way between Keynesianism and monetarism. This essay analyses the application and performance of the Rehn-Meidner model in Sweden. Although never consistently applied, it is possible to distinguish a golden age for the model from the late 1950s to the early 1970s. In the 1970s and the 1980s, governments abandoned the restrictive macroeconomic means of the model and were thus unable to combine low rates of unemployment with low inflation and high economic growth. Since the early 1990s, Sweden has not met the requirement of full employment in the Rehn-Meidner model. Recent declarations by the EU to prioritise full employment once again but without giving up the objectives of price stability and growth legitimise a renewed interest in the model. __________________ JEL classification: E24; E31; E62; J23; J31; J62; O23 Keywords: Swedish model; Rehn-Meidner...
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...1. Critically examine the effectiveness of various approaches that may be used to reduce macroeconomic instability. According to Mc Vaish (Macroeconomics theory, p123) Macroeconomics can be defined as the analysis of the economy wide aggregates such as the analysis of the total output and employment, total consumption, total investment, total saving and national product. Macroeconomic theory employs technique of general equilibrium in order to study the determination of the general price level, money supply, total employment and output levels and fluctuations in these aggregates magnitudes. A macroeconomic stable environment can be defined as one in which inflation is low and predictable, the exchange rate is near its equilibrium level, the government budget is well managed, the budget deficit relative to GDP is at a reasonable level and the use of central bank credit to finance the budget deficit is kept at a minimal level. Macroeconomic stability sends important signals to the private sector about the direction of economic policies and the credibility of authorities’ commitment to manage the economy efficiently. Such stability, by facilitating long term planning and investment decisions, encourages savings and capital accumulation by the private sector. Macroeconomic instability takes place in two forms namely exogenous shocks and inappropriate policies. Exogenous shocks (such as reversal capital flows, terms of trade and natural disasters) require compensatory action...
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...Ministry Of Education and Science of the Republic Of Kazakhstan Ryskulov’s Kazakh Economic University Faculty of “International Educational Programs” Course Work on finance discipline Monetary system of the Republic of Kazakhstan Prepared by: Sayakova Aierke group 242 Scientific advisor: MBA, Ph.D. Candidate Bazarbekova Alma Damerovna Almaty 2011 Content 1. Introduction 2. Theories of money 3. Evolution of money 3.1. Kinds of modern money 3.2 Analysis of structure of monetary weight of Republic Kazakhstan on 2010. 3.3. Money in the world countries 4. Conclusion 1. Introduction Money is the major attribute of market economy. The monetary system functions, stability of economic development of the country in many respects depends. Studying of the nature and the basic functions of money, process of evolution of monetary systems, the organisations and developments of monetary circulation, the reasons, consequences and methods of struggle against inflation is necessary for the subsequent analysis of features of functioning of all financial system. Businessmen in the economic activities constantly deal with monetary units of the country and the foreign states. Money - the historical category inherent in commodity manufacture. Before occurrence of money barter took place. The goods which were used daily concern the most ancient kinds...
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...Week 1 – Chapter 3 Measuring Macroeconomic Performance: Output & Prices * The main indicators of macroeconomic performance: 1. Rising living standards – economic growth | * Tendency for level of output (quality and quantity) to increase over time * Growth in the material wellbeing of the population * Is the responsibility of governments and international organizations | 2. Stable Business Cycle | * Low volatility in fluctuations of actual output around its trend or potential output Avoiding extremes of short-run macroeconomic performance * An economy that is growing excessively may be prone to inflation | 3. Relatively stable price level | * Maintaining the real value of the currency * Low (positive) rate of inflation | 4. Sustainable levels of public and national debt | * Public debt: during a budget deficit, the government must borrow from the private sector to meet its spending * Foreign debt: borrowing by domestic residents from foreign countries, influenced by economy’s current account deficits | 5. Balancing current and future consumption | * The relationship between investments and saving in an economy | 6. Full Employment | * Providing employment for all individuals seeking work * Does not mean zero unemployment | Measuring national or aggregate output/Production: Gross Domestic Product...
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...2014 Submitted To : Dr. Pinky Desai Submitted By: Anu Mary Tom-20135009 Arpita Christian-20135011 Lakshman Shastri-20135031 Mahesh Patel-20135033 Mruganda Shah-20135038 Lakshman Shastri-20135031 Macro Economics Assignment-I Question 1: History of Devaluation of Indian Rupee & its Impacts The Indian rupee, which was on par with the American currency at the time of Independence in 1947, has depreciated by a little more than 65 times in the past 66 years. At the time of independence, there were no foreign borrowings on India's balance sheet. After independence, India had chosen to adopt a fixed exchange rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966. Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar. The rupee's link with the British currency was broken in 1971 and it was linked directly to the US dollar. In 1975, value of the Indian rupee was pegged at 8.39 against a dollar. In 1985, it was further devalued to 12 against a dollar. In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth rate and the foreign reserves were not even worth to meet three weeks of imports. Under these situations, our currency was devalued to 7.90 against a dollar...
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...Financial Liberalisation and Price Stability in Kenya[1] Anders Isaksson Department of Economics, Göteborg University Box 640 S-405 30, Göteborg, Sweden. Abstract It has been postulated in the literature that attempts to liberalise the financial sector when inflation is high can lead to high interest rates and even higher inflation. Thereafter. when inflation is fought, a period of low inflation and high real interest rates follow. Since Kenya experienced this sequence, it appears that prices were unstable before and during the financial liberalisation. This paper argues that this was not the case as evidenced by cointegration between the involved variables and the abliltv to estimate a stable inflation model over the period 1970-91. When the cointegrating relationship breaks down, which it does in Kenya after the financial liberalisation, economic agents can no longer forecast inflation with confidence using Historical data. This breakdown of the cointegratina vector implies that agents switch to forward-looking behaviour, perhaps an indication of lack of credibility, in the financial liberalisation process. JEL Classification numbers: E31, E44 and O11 Kevwords: Kenya, Price stability, Financial liberalisation, Cointegration, VAR. 1. Introduction As part of its financial-sector reform, Kenya liberalised interest rates between January 1988 and July 1991[2]. Subsequently, market interest rates skyrocketed, while inflation rose even further. When undertaking financial...
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...The Savers–Spenders Theory of Fiscal Policy By N. GREGORY MANKIW* The literature on the macroeconomic effects of fiscal policy and, in particular, of government debt is founded on two canonical models. The purpose of this paper is to suggest that both models are deficient and to propose a new model to take their place. The first canonical model is the Barro-Ramsey model of infinitely-lived families (Robert Barro, 1974). According to this model, the government’s debt policy redistributes the tax burden among generations, but families, who want to smooth their consumption over time, reverse the effects of this redistribution through their bequests. Government debt is completely neutral—a proposition called Ricardian equivalence. The second canonical model of government debt is the Diamond-Samuelson model of overlapping generations (Peter Diamond, 1965). In this model, people smooth consumption over their own lifetimes, but there is no bequest motive. When the government issues debt, it enriches some generations at the expense of others, crowds out capital, and reduces steadystate living standards. In this paper, I first discuss the facts that lead me to reject these canonical models. I then propose an alternative model and develop briefly its implications for fiscal policy. consumption over time. There is much reason to be skeptical about this assumption. A large empirical literature, starting with Robert Hall’s (1978) seminal random-walk theorem, has addressed...
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...Threat of fiscal dominance? A BIS/OECD workshop on policy interactions between fiscal policy, monetary policy and government debt management after the financial crisis Basel, 2 December 2011 Monetary and Economic Department May 2012 Papers in this volume were prepared for the joint BIS and OECD workshop on “Policy interaction: fiscal policy, monetary policy and government debt management”, held in Basel on 2 December 2011. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 92-9131-135-9 (print) ISSN 1682 7651 (online) ISBN 92-9197-135-9 (online) Preface The massive expansion of central bank balance sheets to contain the worst financial crisis in living memory raises questions about the theory and practice of monetary policy. The persistence in many advanced countries of large fiscal deficits and the prospect of high public debt/GDP ratios for many years is likely, at some point, to create policy dilemmas not only for central banks but also for public debt managers. Some countries have already had to cope with higher...
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...Foundations of the European Union The European Monetary System and Policy By Maarten Solinger International Business Program i. Executive Summary The European Monetary System and Policy dates back to 1959 when the first step towards monetary union was made with the treaty of Rome. Right now, 47 years later, the euro is a fact, with a monetary system that prevails over all the countries of the euro-zone, with a policy that was originally based on satisfying growth, low to no inflation, low unemployment and lower and more stable prices, as well as elimination of conversion fees, deeper financial markets, and lower volatility therein. It has been successful in accomplishing most of those objectives, even though some are openly disputed. Whether the euro as a whole is successful remains to be seen, since the question if the euro-zone in itself is suitable for monetary union is left largely unanswered. Two criteria are met with, and two are not. The key success factor now and in the future will be the policy of the ECB, which is dual; fight of inflation at the expense of economic growth or vice versa. How long the policy of the ECB can count on the trust of its members depends largely on movements in the world economy, the financial markets and the ability of policy makers to shroud the efforts in political correctness. ii. Table of contents i. Executive Summary p. 2 ii. Table of Contents p. 3 iii....
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...[pic] Professional Higher Education Bachelor's Programme “European Business Studies” Course Paper in Economics TITLE Author: _______________ Group D1AX Supervisor:_______________ Riga, Month 2013 TABLE OF CONTENTS 1. Introduction 3 2. Literature survey 4 2.1 The nature of inflation 4 2.2 Methods of measuring inflation 6 2.3 Reasons and consequences of inflation 9 3. Practical rationale for analysing price dynamics in Latvia 13 3.1 Research into the causes of price changes in Latvia 14 3.2 Overall analysis of price dynamics in Latvia 18 3.3 Examination of price dynamics in relation to particular group of products in Latvia 22 4. Conclusions 25 5. Recommendations 26 6. Bibliography 27 7. Appendices 28 LIST OF TABLES, FIGURES AND FORMULAS Formulas Formula 2.1: GDP deflator 7 Formula 2.2: Inflation Rate Equations Formulas Calculator 7 Tables Table 3.1: Compliance with Maastricht criteria 12 Table 3.2: Government deficit 14 Figures Figure 3.2: Nominal and real household consumption 15 Figure 3.3: Household savings 16 Figure 3.4: Inflation in Latvia 1991 - 2012 17 Figure 3.5: Harmonized consumer price index of the EU Member States 18 Figure 3.6: Private consumption and consumer price index 19 Figure 3.7: Changes of producer prices 20 Figure 3.8: Consumer prices, producer prices and deflator's value...
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...out to review the main theories and empirical methods employed in selecting an appropriate exchange rate regime.In order to achieve this, the paper is organized as follows : Section 2 introduces the distinct classifications of exchange regimes(de jure exchange rate regimes versus the facto exchange rate regimes), and the different theoretical approaches which illustrate how an optimal exchange rate regime is determined . Despite their initial popularity, the theoretical considerations have not escaped criticism.Section 3 reviews the criticism of these theories.A conclusion is provided in Section 4. Keywords : Exchange rate regime, the structural approach, credibility, flexibility, the bipolar view. 1 - Introduction The literature on the selection of exchange rate regimes can be divided into three main groups : the structural approach, the trade-off between credibility and flexibility and the“bipolar view“ or “corner solution“. Classical literature refers to earlier studies which examined systematic differences between floating and fixed exchange rate regimes.The analysis in these studies is closely related to the literature on the choice between fixed and flexible regimes based firstly,on the nature of the shocks generated by changes in...
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...ER E N U OP A E CON OMY E o o cP p r 3 1 Mac 2 0 c n mi a es 1 | rh 0 8 E o o c o en n ena e l gde r ae cn mig vra c i n na e uo ra r Ii B g a eg n E R P A C MMISO U OEN O S IN EMU@10 Research In May 2008, it will be ten years since the final decision to move to the third and final stage of Economic and Monetary Union (EMU), and the decision on which countries would be the first to introduce the euro. To mark this anniversary, the Commission is undertaking a strategic review of EMU. This paper constitutes part of the research that was either conducted or financed by the Commission as source material for the review. Economic Papers are written by the Staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission. Comments and enquiries should be addressed to: European Commission Directorate-General for Economic and Financial Affairs Publications B-1049 Brussels Belgium E-mail: Ecfin-Info@ec.europa.eu This paper exists in English only and can be downloaded from the website http://ec.europa.eu/economy_finance/publications A great deal of additional information is available on the Internet. It can be accessed through the Europa server (http://europa.eu) ...
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