introduction to economics ismail serageldin october 2008
TRANSCRIPT
Introduction To Economics
Ismail SerageldinOctober 2008
Basic Concepts
Barter Exchange
A B
g + s
g + s
Exchange with Promise to Pay
g + s
Pa
A B Time 1
g + s
Pa
A B Time 2
Exchange with third party promise to pay
g + s
Pa
A B Time 1
g + s
Pa
B C Time 2
g + s
Pa
A C Time 3
Exchange with promise of a Central Bank
g + s g + s
g + s g + s
A Central Bank
E
B D
C
Pa Pa
Pa Pa
Pa Pa
Pb Pd
Cashless System with Central Clearinghouse
B
E
A
C
D
g + s g + s
g + s g + s g + s
g + s
Clearinghouse
Public Goods
• Public goods must not be forgotten
• Public goods research must be funded
• Knowledge transfer is a quintessential public good
Public Goods
• Non-excludable
• Non-Rival
• Recognized by Adam Smith in The Wealth Of Nations in 1775.
Clean Air Is A Public Good
Clean Water Is NOT A Public Good
R&D expenditures as percent of GDP
Source: Ernst & Young, Beyond Borders, Global Biotechnology Report 2006
The Private Sector Is Extremely Important
• 68% of all funding in the US – up from 32% in 1960
• 75% of actual R&D in the US is executed by Private sector
• 63% of Global funding
Source: S&E Indicators 2002
US R&D Funding, by Source
Economics
Adam Smith and his “Wealth of Nations” 1776
Adam Smith and “the Invisible Hand”
“As every individual, therefore, endeavours as much as he can … to employ his capital …He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. … he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention”.
Adam Smith in the Wealth of Nations
“…[the state is responsible] for erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain.”
Supply and Demand
Supply and Demand
Shifts to new Equilibrium Points
Shifts
Macro and Micro
Understanding GDP
Gross Business SavingGross Business Saving
Net TaxesNet
Taxes
Disposable Personal Income
Disposable Personal Income
Poverty Observed: US and Selected European Countries, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Poverty before Government policy effects
US and Selected European Countries, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Policy Effects on Poverty:Pre and Post tax and transfers, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Policy Effects on Poverty:Pre and Post tax and transfers, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Policy Effects on Poverty:Pre and Post tax and transfers, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Policy Effects on Poverty:Pre and Post tax and transfers, 1991
0 5 10 15 20 25 30
Belgium
Canada
Denmark
France
Ireland
Italy
Netherlands
Sweden
UK
USA
% POORSource: Robert Solow, “Welfare: The Cheapest Country”’in NYRB, 23 March 2000, p. 20-23
Gross Business SavingGross Business Saving
Net TaxesNet
Taxes
Disposable Personal Income
Disposable Personal Income
Finance And The Real Economy
Production, Employment
Real World Production
Real World Consumption
Money!
Money and Banking
• Money supply
• Credit
• Banking services (mobilize savings, advance credit)
Like Blood
Circulation or
Respiration are to the
Human Body
Without it you go back to the barter economy
Capital markets
• Securities (equities)
• Bonds
• Credit (loans)
Monetary Policy
• Credit
• Interest rate
• Money supply
• Exchange rate
• FOREX
• Banking system: RRR, capitalization, oversight
The Central Bank
• Responsible to maintain the stability of the national currency and money supply
• Controlling subsidized-loan interest rates
• Lender of last resort to the banking sector during times of financial crisis (private banks being integral to the national financial system).
Central Banks Supervisory Powers
• To ensure that banks and other financial institutions do not behave recklessly or fraudulently.
• Instruments:– RRR– Open market operations– Basic interest rate
Financial regulations • All forms of regulation or supervision,
which subject financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system.
• This may be handled by either a government or non-government organization.
Other Supervisory Bodies
• Securities and Exchange Commission (SEC)
• Rating agencies
• Audit regulations
Economic Policies
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
Objectives of Economic Policy
• Growth
• Price stability
• Employment
• Exchange rate
• Income distribution
• Reserves
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Growth and Poverty Reduction
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Growth and Poverty Reduction
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Jamaica
Costa Rica
India
MalaysiaIndonesia
SingaporeThailand
Taiwan
Sri LankaMexico
Brazil
Bangladesh
Pakistan
Growth and Poverty Reduction
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Jamaica
Costa Rica
India
MalaysiaIndonesia
SingaporeThailand
Taiwan
Sri LankaMexico
Brazil
Bangladesh
Pakistan
Growth and Poverty Reduction
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Jamaica
Costa Rica
India
MalaysiaIndonesia
SingaporeThailand
Taiwan
Sri LankaMexico
Brazil
Bangladesh
Pakistan
Growth and Poverty Reduction
0.0
2.0
4.0
6.0
8.0
10.0
10.08.06.04.02.00.0 12.0
% annual growth in GDP/person
% annual decline in poverty(Headcount
index)
Jamaica
Costa Rica
India
MalaysiaIndonesia
SingaporeThailand
Taiwan
Sri LankaMexico
Brazil
Bangladesh
Pakistan
Growth and Poverty Reduction
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Macro-policy
• Necessary but not sufficient
• Sectoral policies and the development of projects at the grass roots level.
• Money and credit
• The importance of the real economy
• Tradeables and non tradeables
• Public goods and private goods
Social Policy
• Not the same as The social impacts of economic policies
• Sound Social policies will have beneficial economic impacts
Social Policy
• Maintain social cohesion
• Promote social mobility
• Reduce income inequality
• Promote gender equality
• Address the ultra-poor
• Cultural identity
• Etc.
Employment• Mobility, both geographic and
occupational• Regulations:
– Labor laws, – credit, – legalization, – Registration of startups– Incubators– venture capital etc.
• Fiscal and other incentives (e.g. military service, training tied to jobs, etc.)
Critical Transitions
Education For Learning & Life
Entering The Labor Force
Choosing Healthy Lifestyles
Forming Families
## 81
Becoming Effective Citizens
Must Ensure Youth Employment
How Much Wasted Talent?
How many youthful dreams will remain unrealized?
Youth Employment Policies
• The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs
• The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices.
• Include second chances.
Youth Employment Policies
• The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs
• The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices.
• Include second chances.
Youth Employment Policies
• The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs
• The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices.
• Include second chances.
Youth Employment Policies
• The opportunities available to youth not only to acquire human capital but also to deploy it in promising jobs
• The capabilities that youth have to choose between the available opportunities, and support them to make the most constructive choices.
• Include second chances.
Empowerment
• Empowerment of youth (and other groups):– Increase assets– Increase returns held by youth (usually
labor and education)
The Instruments/Levers Of Economic Policy
Fiscal Policies
• Pattern of public spending (G)
• Investment and consumption (I+C)
• Subsidies
• Taxes
• Public deficits and surpluses
Taxes
• Income
• Tariffs
• Property
• Transaction (sales or VAT)
• Capital Gains
Borrowing
• Domestic and foreign
• Crowding out the private sector
• The structure of debt
• Preferred creditors
Other Obligations
• Social Security
• Insurance
• Pension Funds
Trade
• Comparative Advantage
• Fair Trade
Monetary Policy
• Credit
• Interest rate
• Money supply
• Exchange rate
• FOREX
• Banking system: RRR, capitalization, oversight
Money and Banking
• Money supply
• Credit
• Banking services (mobilize savings, advance credit)
A wise balance between regulation and encouraging
private initiative
Concern with Busioness cycles
Counter-cyclical Policies
• Anti-recession:– Easy money and credit– Tax cuts– Increased government spending
• Anti-inflation:– Tight money– Higher taxes– Budget surplus
Money, Banking And Finance
Money and Banking
• Money supply
• Credit
• Banking services (mobilize savings, advance credit)
The Lessons Of the Past:Do Not Just Print Money!
Hyperinflation!
• By the end of 1923 the German currency was of no value at all. The quarterly rate of inflation stood at 52,000%, which is the equivalent to an annual rate of 7,000,000,000,000%.
• In 1924 the currency was replaced with a new currency
1Mark
1921- 1923
50Mark
1921- 1923
10,000Mark
1921- 1923
100,000Mark
1921- 1923
1,000,000Mark
1921- 1923
5,000,000Mark
1921- 1923
50,000,000Mark
1921- 1923
500,000,000Mark
1921- 1923
1,000,000,000Mark
1921- 1923
10,000,000,000Mark
1921- 1923
From 1 Mark to 10,000,000,000
Mark
1921- 1923
Worthless Money
• Using paper money as wallpaper or as fuel
Monetary Policy
• Credit
• Interest rate
• Money supply
• Exchange rate
• FOREX
• Banking system: RRR, capitalization, oversight
Recapitulation
Monetary Policy
• Credit
• Interest rate
• Money supply
• Exchange rate
• FOREX
• Banking system: RRR, capitalization, oversight
Fiscal Policies
• Pattern of public spending (G)
• Investment and consumption (I+C)
• Subsidies
• Taxes
• Public deficits and surpluses
Borrowing
• Domestic and foreign
• Crowding out the private sector
• The structure of debt
• Preferred creditors
Taxes
Taxes
• Income
• Tariffs
• Property
• Transaction (sales or VAT)
• Capital Gains
Other Obligations
• Social Security
• Insurance
• Pension Funds
Money and Banking
• Money supply
• Credit
• Banking services (mobilize savings, advance credit)
Counter-cyclical Policies
• Anti-recession:– Easy money and credit– Tax cuts– Increased government spending
• Anti-inflation:– Tight money– Higher taxes– Budget surplus
Excessively Reductionist?
Vehement Reactions
• Dehumanizing the humanities
• Denies individualism
• Treats people like products or machines
• Economics is not the whole story
• Etc. etc.
Serageldin on Reductionist Views
• Three buckets of water and a handful of minerals held together by chemical reactions…
• A society is more than the sum of its economic and financial transactions…
Serageldin on Reductionist Views
• Three buckets of water and a handful of minerals held together by chemical reactions…
• A society is more than the sum of its economic and financial transactions…
Now, let us turn to the global crisis