abcde "breve corso di economia" (eng)

8/13/2019 ABCdE "Breve corso di economia" (ENG)

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A. Pinto

A. Pongpiriyakan

A. Sabatucci

Breve corso di Economia


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TODAYSLECTURE1. Market Inefficiences2. Government Intervention

3. Market Perception of the Risk

4. Intergenerational Redistribution

5. Solow Model

6. TFP Determinants

7. The importance of International Trade

8. Leave the Euro Zone? Pro and contra.

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Market Inefficiences 1/3

Classical Economist Model (Adam Smith, 1776):An Inquiry into the Nature and Causes of the Wealth of Nations

The Invisible hand :

The invisible hand is a natural phenomenon that

guides free markets and capitalism through

competition for scarce resources

Does it always work?

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Does it always work?Market Inefficiences 2/3

It depends

Long term YES

Short term NO

Long term growth is more important thanbusiness cycles

Policies to avoid BC could negativly affect

long term growth so should be avoided

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Market Inefficiences 3/3

Business

Cycles Effect during a Recession:

- Unemployment rate increases

- Living Standards decreases

In order to minimize the negative impact of businesscyclesitsallowed the:

Government Invervention

Ex:Great Depression of 1929

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1. Market Inefficiences

2. Government Intervention3. Market Perception of the Risk


5. Solow Model

6. TFP Determinants



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Government Intervention 1/3

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Keynes (1936):

The General Theory of Employment, Interest and Money

Classic Model of Smith:Market restore itself after atemporary shocks

NeoClassic Model of Keynes:In the Short Term the marketis not always able to recover byiteself but it the long run it does(but in the LR wearealldead)

Internvention of State to boost the ST Demand in some KeyIndustry.


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Public FundsCollection

Taxations Current/Future

Expenses

SovereignDebt Issuance

CapitalExpenses


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Sovereign Debt IssuanceGermanLT Bond

Risk Premium for ageneral N title

Spread


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2. Government Intervention

3. Market Perception of theRisk4. Intergenerational Redistribution

5. Solow Model

6. TFP Determinants



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Market Perception of the Risk 1/4

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The interest rate for each financial product shouldreflect associated risk.

Ex:

Financial Perception of (Germany VS Italy)

Germany:Long Term Stability

Sustainable Growth

Italy:Long Term Stability(????)

No Growth in the last 20y

The spreadbetween the Italian and the German LTBonds reflect the perceived default risk / capability torepay the debt.


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WhatisMarket Perception?

Its the collective view on certain assets by themarket players (Banks, Private Sector)

Whatimpact on Market Perception?

Credit Rating Agency

Credibility

+ other endogenous variables


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Credit Ratings Agency (S&P, Moodys, Fitch) Whatdotheydo?They collect finacial andnon financial data toevaluate the performanceof each financial product.

Why does the market

care?The market believes thatthe CRA are the bestavailable means of determing risk.

Aretheyalwayscorrect?No. Ex: Subprime Crisis


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Credibility refers to the objective and subjective components ofthe believability of a source or message.

Two key components:Trustworthiness:The fact you follow trough your promises, without changing

your mind over and over again (Berlusconi does).Expertise:The knowledge and the skills to speak about something (Grillodoes not).


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3. Market Perception of theRisk

4. Intergenerational Redistribution5. Solow Model

6. TFP Determinants



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Intergenerational Redistribution

Shift tax burden to future generation

When is not balanced?Today -> I borrow to satisfy my short term needs(Socialist Total Welfare)

Future -> the future generations will repay my debtwithout receiving any benefits

Why is not balanced?Because Politicians take care only to be elected so they

want to satisfy present needs of the current electoralconstituency, without consindering the future impact ofthese decisions.


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5. Solow Model6. TFP Determinants



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The Solow Model (also known as Exogenous GrowthModel), is a simple economic model of long-runeconomic growth.

Solow Model 1/6

The key variables:

1. K = Capital (amount of tangible/intangible assets)2. L = Labour (amount of total hours in the market)NB because the Unemployment Rate in the long run is fixed, L doesntreally affects longrun growth

3. A = Residual Factor called Total Factor Productivity (TFP)


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Solow Model 2/6


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Solow Model 3/6

Steady State

K has diminishingreturns to scale


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Solow Model 4/6


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Solow Model 5/6


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Solow Model 6/6


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5. Solow Model

6. TFP Determinants7. The importance of International Trade


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TFP Determinants 1/2

Productivity of L :i. Knoledge, Education

& Training

ii. Health

iii. Competition, SocialDimension &Environment

iv. Institutions

Productivity of K :i. Innovation of Product

ii. Innovation of Process

iii. Infrastructure

iv. Structural change andresource reallocation

v. Financial system

vi. Integration (trade)

vii. Geography


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TFP Determinants 2/2


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5. Solow Model

6. TFP Determinants

7. The importance of International Trade8. Leave the Euro Zone? Pro and contra.

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The importance of International Trade 1/7

1. Because economic integration worths more than sum of itsparts.

2. Specialisation of production (Comparative and Absolute

advantages).

3. Variety of goods in the market (car industry example)

4. These are some of the ideas that gave birth to the EuropeanUnion!

Why is International Trade Important?


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The importance of International Trade 2/7Comparative & Absolute Advantage

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GlobalisationWhen countries trade, they become more connected.

Economy of one country also effects its trading partner.

This is the global trend.

WTO is founded in 1995, now with 159 member countriesIts objective is to encourage trade by eliminating barriers(tariff and non-tariff measures)


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Is it always good?Not for everyone

When a country opens its border to trade, some industry could suffer fromforeign competition.

To decide, we need to compare cost with benefits:1. Poverty reduction:

WTO cites trade lifted more than 500 million people from poverty

2. Trade offers new markets to sell goods and services3. Many industries that are hurt are inefficientSurvival of the fittest? (BRICs Ex)4. Is manufacturing and skills concentration a bad thing?


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5. Solow Model

6. TFP Determinants


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To Leave or not to Leave EuroZone? 1/4


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PROs:1. Monetary policy independence:

This means allowing each country to manage its own currency

2. Higher Responsiveness:a. Recession in Spain and Greece could be better responded

b. Each Eurozone country has different economic cycle

c. The fact is the Eurozone has strong north-south divide


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CONs:1. No Exit:

No legal and logistical possibility

2. Even if this happens, there will be chaosa. Capital flight

b. External debt restructuring/default?

c. UBS estimated that if Greece leaves the Euro, Greek economy

will shrink by 50 per cent!


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Conclusions: No guarantee EuroZone exit would lead to better

management of economy.

Critics argue that good governance is needed, not acurrency exit.

Euro breakup leads to currency fluctuation. This isactually one original reason Euro was founded!


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ThankYou

abcde "breve corso di economia" (eng)

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