1. INTRODUCTION TO ECONOMICS GROWTH ECONOMICS and Fund-raising in international cooperation SECS-P01, CFU 9 Growth Economics academic year 2018-19 1. INTRODUCTION TO ECONOMICS Roberto Pasca di Magliano Fondazione Roma Sapienza-Cooperazione Internazionale roberto.pasca@uniroma1.it

What is Economics? Economics is a social science which analize the economic agent’s choices and the interaction among the single choices. In other words, Economic Science studies the modality through which individuals, organizations and enterprises employ scarce resources to produce various types of goods and services, as well as the ways in which they are distributed among the subjects (families, entreprises, institutions) to satisfy their present or future needs. Economics assume that the choices of single agents are: based on a criteria of rationality aimed to maximize objectives of individual interest (profits, utility, etc.) Roberto Pasca di Magliano 2018-19

Partial list of topics (not enough) The list (even if enriched) is never enough to descrive the contents the economic science. These topics are not the sole interest of economics as it also concerns: Other disciplines (sociology, law, etc.) Social actors (enterprises, banks, trade unions, etc.) Institutions (either local, national or international) It is then necessary to specify the point of view and the method choosen by the economists while studying these topics. Roberto Pasca di Magliano 2018-19

General Principles: Scarcity «Scarcity of resources» reflects the fact that, in a given momenet of time, the resources are not available in unlimited quantities and that they can be used alternatively in different systems of production. «Effetcs of scarcity» on societies, institutions, organizations as well individuals and companies concerns the need to choose within a limited set of possibilities between objectives and scarce means to be used for alternative applications. Scarcity means that any resource acquires a value (euilibrium price and at the same time scarcity index) Roberto Pasca di Magliano 2018-19

General Principles: Reliable and complete information Economic Science assumes that all the data relative to the prices of any good and to the available technologies are both: well known and complete a-priori available both to the entreprises producing goods and to the consumers buying them Roberto Pasca di Magliano 2018-19

General Principles conclusion: Scarsity and Full Information -> Rationality Fundamental principles on which of economic analysis is based concerns both resource’s scarsity and perfect data information. So that it allows that any choice will respond to the rationality. We already know that: Scarsity assumes that production resources are avallabile in limited quantities and then they can be used alternatively in different production process Perfect information assumes that all the economic agents have full access to data set and administrative information Both scarcity and perfect information hypothesis imply a rational behaviour. Rationality assumes that economic agents’ behavior is able to evaluate costs and benefits following each available set of alternative economic scenario. Roberto Pasca di Magliano 2018-19

Microeconomics – main topics 1. Consumer Choice Theory How a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases 2. Theory of the Production How a firm chooses the inputs to be used and in which quantity, as well as how it decides about production mix 3. Market Structure Characteristics and degree of market power held by sellers and buyers P.S. The knowledge of the Theory of the Production is important for better understanding the Growth Theory Roberto Pasca di Magliano 2018-19

Macroeconomics – main topics National Income Country’s GDP, national consumption, saving & investment, public expenditure, balance of payment. 2. Employment Typologies (structural, conjunctural), productivity, labour-force, rate of employment and unemployment, etc. 3. Political economy Political policies (public investments, redistrubution measures, etc,) Fiscal policies (taxes, transfers, etc.) Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank Roberto Pasca di Magliano 2018-19

Macroeconomics– Evidence from Great Depression Modern Macroeconomics is due to John Maynard Keynes, author of The General Theory of Employment, Interest and Money. The origin was the Great Depression (Wall Street, 1929) that causes a dramatic loss of output by the private sector resulting in a systemic shock that causes serius social problems. Government spending policies have been analysed to compensate lack of investments. Main events: Business lost income and reserve capital, so it had dismissed workers. Workers had less money to spend as consumers. Higher incomes people have a lower marginal propensity to consume their incomes while people with lower incomes are inclined to spend their earnings immediately The dramatic reduction in supply and then in demand lowered the rate of growth. Spending should therefore target public works programmes on a large scale to speed up growth to its previous levels. Roberto Pasca di Magliano 2018-19

Macroeconomics– Keynes revolution Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries). Any increase in demand has to come from one of these four components. But during a recession, strong forces often dampen demand as spending goes down. The reduction in spending by consumers can result in less investment spending by businesses, as firms respond to weakened demand for their products. This puts the task of increasing output on the shoulders of the government. According to Keynesian economics, state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle. The Keynesian economy works along three major aspects: Aggregate demand is influenced by many economic decisions—public and private Prices, and especially wages, respond slowly to changes in supply and demand Changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. Roberto Pasca di Magliano 2018-19

Macroeconomics– Aggregate Demand Aggregate demand represents the total demand for final goods and services in the economy (Y) at a given time and price level. It is the gross domestic product, even called effective demand Y = C + I + G + (X – M) < or = P where: C represents consumption (may also be known as consumer spending) = basic consumption (a) + propensity to consume available income b (Y – T), I represents investment (demand componet as inversly related to interest rate) G is government spending, composed by taxes (T) devoted to public consumption and public investment X – M represents net export (i.e. surplus or deficit of the balance of payment) or viceversa Y is national income P is the maximum potential domestic production Roberto Pasca di Magliano 2018-19

Keynesian economy: main issues to remember In the short run, during recession, economy is influenced by aggregate demand (Y) that is lower than the maximum potential productive capacity of th econmy. Productive capacity of the economy is influenced by a many factors affecting production, investment, employment and inflation that are not always arranged in the correct way. Keynesian economists argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular: monetary policies by the Central Bank, manly oriented to the control of the inflation rate; fiscal policies  by the Government, in order to stabilize output over the business cycles.  Keynesian economics advocates a mixed economy – predominantly private sector - but with a role for government intervention during recession phase. Roberto Pasca di Magliano 2018-19

Macroeconomics– Aggregate Demand curve Roberto Pasca di Magliano 2018-19

Macroeconomics– Aggregate Demand, dept role A Post-Keynesian theory of aggregate demand emphasizes the role of debt, which it considers a fundamental component of the aggregate demand. The contribution of change in debt to aggregate demand is referred to by some authors as the credit impulse. Aggregate demand is spending, be it on consumption, investment, or other categories. Spending is related to income via: Income – Spending = Net Savings Re-arranging spending items and improving yields: Spending = Income – Net Savings = Income + Net Increase in Debt In simple words: spending capacity is represented on earnings plus borrowings. If you spend $110 and earn $100, then you need to borrow $10; conversely if you spend $90 and earn $100, then you have a net savings of $10, or you can reduce your debt by $10. Roberto Pasca di Magliano 2018-19

Macroeconomics– Aggregate Demand, debt role implications From the perspective of debt, the Keynesian prescription of government deficit spending in the face of an economic crisis consists of the government net dis-saving (i.e. increasing its debt) to compensate for the shortfall in private debt: it replaces private debt with public debt. The alternative could be oriented to restart the private debt growth ("reflate the bubble") or slowing its fall by appropriate public policies devoted to support private investment or by monetary policies oriented to reduce interest rate Debt sustaibility (or service to debt) depends mainly on the country’s credibility in the world capital market. Credibility affects the evaluation of the effectiveness of both the State institutions and the economic policies. It is also affected by speculations purposes. Roberto Pasca di Magliano 2018-19