MACROECONOMIC POLICY IN THE ASIA-PACIFIC GECO6400 ECONOMIC GROWTH MACROECONOMIC POLICY CHALLENGES COURSE REVISION

ECONOMIC GROWTH The Asia-Pacific region consists of economic systems that range from free market to centrally planned. Free market-based capitalist economies experience regular periodic fluctuations in the production of output. Such fluctuations are often referred to as business cycles.

COUNTRYECONOMIC SYSTEMRESOURCE OWNERSHIP Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand Vietnam Free market Centrally Planned Free Market Mixed Free market Mixed Free market Free Market Private State Private State and Private Private ECONOMIC GROWTH

The Business Cycle The business cycle refers to the irregular fluctuation of real output in a capitalist economy over a period of time. This fluctuation tends to be wave-like and consists of 4 recurring phases:  Peak  Recession  Trough  Recovery

Time Change in GDP PEAK TROUGH RECESSION RECOVERY Wavelength AmplitudeAmplitude ECONOMIC GROWTH

Phases Repetitive aspects of the cycle.  Peak: economic activity reaches a maximum  Recession: decline in economic activity  Trough: economic activity reaches a minimum  Recovery: increase in economic activity.

ECONOMIC GROWTH Causes What turns the cycle?  Man-made Political Technological  Natural Disasters Discovery

ECONOMIC GROWTH Characteristics How to determine what phase of the cycle predominates.  Output  Employment  Inflation  Aggregate Demand Consumption Investment Exports and imports

Mechanisms What keeps the cycle going?  Aggregate Expenditure  Consumption  Investment  Exports  Expectations ECONOMIC GROWTH

PHASE POSSIBLE CAUSESCHARACTERISTICS PEAK High output Low unemployment High prices High Aggregate demand RECESSION Natural disaster War Declining output Rising unemployment Falling prices Decreasing aggregate demand TROUGH Low output High unemployment Low prices Low Aggregate demand RECOVERY Breaking of a drought Discovery of new technology Innovation Rising output Declining unemployment Rising prices Rising Aggregate demand

ECONOMIC GROWTH Source: Patnaik, Ila and Rachna Sharma, ‘Business Cycles in the Indian Economy’, Margin, Vol.35, No.1, pp.71-79, October-December 2002.

ECONOMIC GROWTH Class Task Find one complete business cycle and provide years for:  Peak  Recession  Trough  Recovery Discuss any macroeconomic problems associated with the phases of the cycle and suggest policies to alleviate them.

MACROECONOMIC POLICY CHALLENGES Overview Economic integration in the Asia-Pacific region has been advancing rapidly over the past decade, driven by growing intra-regional trade, increasing investment and financial integration. Based on regional and bilateral free-trade agreements as well as emerging financial cooperation arrangements, this process is likely to increase over time. Reflecting increasing trade and investment flows, business cycles across countries in the region are becoming more correlated.

Challenges 1.Development and integration of different economic systems 2.Managing growth and development  Infrastructure development  Structural reform  Climate change  Ageing population  Income distribution MACROECONOMIC POLICY CHALLENGES

4.Global Integration  Trade Policies open vs closed global vs regional and multilateral vs bilateral  Capital Markets Regulation of international capital flows Financial system regulation Exchange rate systems 5.Balance of development  Distribution of gains between economies MACROECONOMIC POLICY CHALLENGES

THE MACROECONOMY  The Economic Problem  The Circular Flow of Income  Economic Sectors  Measuring Output: GDP, methods, nominal and real, alternative measures of economic welfare (HDI, GPI). COURSE REVISION

MEASURING EMPLOYMENT AND INFLATION  Defining and measuring unemployment  Unemployment rate, Participation rate  Types of unemployment  Discouraged workers  Defining and measuring inflation  Costs of inflation  The Philips Curve COURSE REVISION

MACROECONOMIC MODELS  Aggregate Expenditure Model  Economic sectors  AE=C+I+G+(X-M)  45-degree line diagram  MPC and MPS, APC and APS  Equilibrium Income (Y=AE)  Multiplier COURSE REVISION

MACROECONOMIC MODELS  Aggregate Demand and Aggregate Supply  Aggregate Demand  Aggregate Supply: short-run and long-run  Movements along vs shifts  Equilibrium  Application of AD-AS model: inflation, Stagflation COURSE REVISION

FISCAL POLICY  Federal Budget Outcome  Financing a Budget Deficit  Discretionary and non-discretionary Fiscal Policy  Automatic Stabilisers  Fiscal Policy transmission mechanism  Crowding Out  Net export effect  Problems with Fiscal Policy COURSE REVISION

MONEY AND BANKING  Defining money  Money Demand and Money Supply  Credit creation: reserves, reserve ratio MONETARY POLICY  Open Market Operations  Monetary Policy transmission mechanism  Monetary Policy, interest rates and exchange rates  Second-round effects of Monetary Policy COURSE REVISION

INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTS  Current Account: Current Account Deficit  Capital and Financial Account  Terms of Trade  Foreign Debt  Twin Deficits COURSE REVISION

EXCHANGE RATES  Definition and determination  Exchange rate systems  Flexible  Managed  Fixed interest rates and exchange rates Purchasing Power Parity COURSE REVISION

ECONOMIC GROWTH  Business Cycles COURSE REVISION