1. MACROECONOMIC FRAMEWORK AND EMPLOYMENT CREATION
Dr. Yaw Baah
Deputy Secretary General
Trades Union Congress (Ghana)

2. AGGREGATE DEMAND MODEL
GDP = C+I+G+X-M
Where:
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports

3. The aggregate demand model (cont’d)
In this model, an increase in any of the following variables will lead to growth (ceteris paribus)
- Consumption,
- Investment
- Government Spend
- Exports
Note: Imports constitute a leakage in the model. Therefore, increase in imports reduces aggregate demand within the economy

4. EFFECTS OF GDP (GROWTH) ON EMPLOYMENT
Growth means Increase in GDP (in nominal and real terms)
What is Nominal Growth?
What is Real Growth?
How does Growth affect Employment Creation?
Normally, it is expected that GDP growth leads to increased employment
But empirical evidence shows that GDP growth may not lead to significant employment creation

5. EFFECTS OF CONSUMPTION AND EMPLOYMENT CREATION
Growth in Private consumption means increased demand of goods and services in the economy. This will lead to the creation of jobs in the economy (if the goods are produced in the economy and not imported).
The opposite is true (if all other variables are held constant)
What factors affect consumption, generally?
prices
Income levels
Population size

6. EFFECTS OF INVESTMENT AND EMPLOYMENT CREATION
Investment enters the model with a positive sign.
Therefore, an increase in investment leads to growth and employment creation (holding all other factors constant)
What factors affect Investment?
- Stable social and political (low political risks)
- stable economy (low inflation, low interest rate, stable currency) – high degree of predictability and low economic risks,
- availability of natural resources
- availability of skills (human capital)
- availability of social and economic infrastructure (road, railways, airports, seaports, water, electricity, energy, power, health facilities, educational facilities)

7. EFFECTS OF GOVERNMENT SPENDING AND EMPLOYMENT CREATION
Increases in Government spending has positive impact on employment if :
a reasonable portion of the expenditure goes into creation of employment in the public sector (health, education, etc.)
Through multiplier effects

8. EFFECTS OF EXPORTS AND EMPLOYMENT CREATION
Exports enter the model with a positive sign
Therefore, increase in exports may generate employment provided:
The source of the increased exports is labour intensive
If the production for exports is capital intensive (like surface mining) exports may increase, GDP may increase (growth) but employment may not increase (as in the case of mining output in Ghana in recent years)

9. EFFECTS OF IMPORTS AND EMPLOYMENT CREATION
Imports enter the model with a negative sign
This means imports are a leakage in the economy
It may create employment in the trade, transport and other service sectors
But, generally, the net effect of imports on employment may be negative because the production of the goods take place elsewhere (employment is created in another the economy where the goods are produced. What constitutes imports in one economy is export in another economy)

10. MACROECONOMIC POLICY
MACROECONOMIC POLICIES FOCUS ON THE FOLLOWING VARIABLES:
GDP (growth)- The value of output of goods & services produced within a specific period of time
Inflation – Persistent increases in price levels
Interest rate – Cost of capital/borrowing
Exchange rate – the value of domestic currency in terms of other (major) currencies such as the US$, Euro, Yuan, Yen, Pound, etc
Employment rate – the percentage of the total labour force that is working
Unemployment rate – The percentage of the labour force that is not working (but are ready to work at prevailing wages)

11. The Objectives of Macroeconomic Policy
Growth in output
Employment creation
Domestic Price Stability
External Price Stability
Any weakness in any of these goals is a source of worry to Government and the people because of its welfare implications
November 20, 2018
(c) Nii K. Sowa

12. Objectives of macroeconomic policy (cont’d)
Economic policy management involves the creation of conditions which will enable the country to meet its desired targets with respect to these objectives.
This is where the first challenge arises with economic policy management:
Limitation of resources
Conflicting Goals
November 20, 2018
(c) Nii K. Sowa

13. + + + Sectors of the Economy Households & Firms The Financial Sector
The Government Sector +
The Foreign Sector +

14. GDP Growth Year 1 Year 2 Size of the economy ECONOMIC GROWTH

15. Illustration of the aggregate demand model
Taxes (T)
Savings (S)
Imports (M)
Consumer Expenditure
(C)
Investment Expenditure ( I )
Government Expenditure (G)
Exports-Imports (X-M)
Leakages
Investment Spending
(I)
Government Spending
(G)
Exports
(X)
Injections
Demand Slump (Recession)
Equilibrium
Demand Expansion (Boom)

16. Understanding Macroeconomic Policy
Policy Options
Fiscal Policy
changes in taxation and government expenditure
interventionist approach = Keynesianism
Monetary Policy
changes in short-term interest rates and liquidity
influence on macroeconomic climate
Exchange Rate and Trade Policy
fixed v floating exchange rates
implications for trade, capital flows, domestic inflation and competitiveness
Supply-Side Policies
sustainability of economic growth in long-term
deregulation, competition, incentives

17. Fiscal Policy
This is the government’s decisions about spending and taxes
This seems to give power to fiscal policy to influence equilibrium output
Direct taxes affect the slope of the consumption relationship and hence the slope of the AD schedule
But this ignores crucial effects, e.g. on prices and the rate of interest
Government expenditure affects the position of AD

18. Monetary Policy
Interest rates pushed down
Bond prices pushed up
Increase in demand for financial assets (eg bonds)
Increase in money supply
Increase in demand for goods and services
Further rises in consumer and investment spending
Aggregate demand rises
Money GDP rises
or Output? P?
Process by which an increase in the money supply affects aggregate demand

19. Recession GDP Wages & Salaries Welfare payments Gross personal incomes
Government
Expenditure
Employment
Unemployment
Government
Borrowing
Taxes
Money
supply
Interest
rates
Investment
spending
Savings
Flow of
foreign funds
Inflation
Inflation
Personal
disposable
incomes
Exchange
rate
GDP
Demand
for
imports
Exports
Consumers
expenditure
Trade
balance
Demand
for domestic
output

20. Economic Performance Under Direct Controls (Ghana)
Table 1: Some Economic Outcomes Under The System of Direct Monetary Control (percent)
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Real GDP
-3.2
-5.9
-3.9
8.5
5.1
5.2
4.8
5.6
3.3
Inflation
100.4
16.7
142.4
6.0
19.5
33.3
34.2
26.6
30.5
35.9
Money (M2)
38.2
23.4
64.5
44.7
59.5
53.5
53.0
43.1
26.9
18.0
Interest Rates
10.5
14.5
18.5
20.5
23.5
26.0
33.0
Source: Bank of Ghana
November 20, 2018
© Nii K. Sowa

21. Economic Performance under the Indirect Monetary Control (In Ghana)
Table 2: Some Economic Outcomes Under The System of Market-Based Monetary Control (percent)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Real GDP
5.3
3.9
5.0
3.8
4.5
5.2
5.1
4.7
4.4
3.7
4.2
Inflation
10.3
13.3
27.7
34.2
70.8
32.7
20.8
15.7
13.8
40.5
21.3
Money (M2)
15.0
59.4
27.4
46.2
37.4
45.1
28.2
19.8
33.8
47.9
Interest Rates
20.0
30.0
35.0
25.0
45.0
37.0
27.0
Source: Bank of Ghana
November 20, 2018
© Nii K. Sowa

22. ECONOMIC OUTCOMES UNDER THE INFLATION TARGETING FRAMEWORK
Table 3: Economic Performance in the MPC-Era ( , end year data, percent)
GDP Growth Rate
Rate of Inflation
Treasury Bill Rate
Ave. Lending Rate
Repo Rate
Reverse Repo Rate.
2000
3.74
40.5
38.0
47.0
27.0
26.0
2001
4.20
21.3
27.6
43.8
2002
4.50
15.2
26.6
38.5
24.5
21.0
2003
5.20
23.6
18.7
32.8
21.5
20.5
2004
5.80
11.8
17.1
28.8
18.5
17.5
2005
14.8
11.5
15.5
14.5
2006
6.20
10.5
9.6
23.8
12.5
Source: Bank of Ghana, Research Department; Government of Ghana, Budget Statements; and Ghana Statistical Service, various, CPI Newsletters.
November 20, 2018
© Nii K. Sowa

23. CONCLUSION
Economic policy in Africa in recent times has focused on growth and inflation-targeting as a result of the pressure from IMF to reduce inflation
Even though Africa has experienced higher growth in recent times it has been jobless growth because the source of growth has been investment in the natural resource sector (gold, oil, timber)
Macroeconomic policy should rather focus on employment creation (fiscal policy, monetary policy, investment policy, trade policy, labour market policy and all other policies must focus on employment creation)
But the basic information/data on employment is lacking in most African countries
The only effective way we can reduce poverty/increase living standards and achieve relative peace in the world is to reduce poverty.
November 20, 2018
(c) Nii K. Sowa

24. END THANK YOU!