Economics and Statistics

Current account deficit:  this will cause a currency depreciation, as the demand for imported goods is bigger than the foreign demand for exported goods.   This will make it easier for domestic producer to exports their goods as they, the goods, become relatively cheaper on the foreign market. A deficit in the balance of trade implies that the financial account must be positive (remember Xn= S-I). In order to pay for the imported goods, it must be the case that foreign entities own more domestic financial assets. Furthermore, foreign countries will buy domestic government debt. The central bank can try to offset inflation by raising the interest rate which can then attract foreign capital (i.e money). However, in the short term, this will be a monetary contractionary policy. Current account surplus: The domestic currency will appreciate, since foreign demand for exported goods is bigger than the domestic demand for imported goods. Note that domestic savings are then used to finance for

Balance of payment is the sum of three separate accounts and must always be equal to 0 (given no statistical error): Current account: the net flow of funds exchanged for goods and services, and monetary gifts  that flow in and out of a country. This is often used as an indicator for net export. Financial account: also known as the capital account, is the net flow of funds for investment in real assets (direct investments) or financial assets (stocks or bonds) into a nation. Official reserves: in order to balance the two accounts above, a country must have a reserve of foreign money. It measures the net effect of all money flows from the other accounts. If the current account is positive, it must be the case that the sum of the financial account and official reserves is negative. Current account (CA) components: Balance of trade in goods: spending by consumers and firms on imported and exported goods. Exported goods have a positive effect on the current account, whereas imported goods h

  Economic growth: measures the change in productive capacity of an economy between one period of time and another. If growth is negative, then the economy is experiencing a recession. If growth is positive, then the economy is expending. If the rate of population growth is smaller than the rate of economic growth, then on average people are becoming richer. Measuring economic growth (in discrete terms): Short term vs long term economic growth: we saw that an increase in the aggregate demand curve increases a nation's output only temporally. However, if the aggregate supply changes due to new technology or to a change in the factors of production (excluding wages) then the LRAS would shift, leading to a sustainable long term economic growth.  Note that when the aggregate demand hits the LRAS there is no long term economic growth assuming constant technology and capital levels.  Sources of long term economic growth: Human capital: anything that makes labor more productive. Here is a

Using our previous exercise, assume that the U.S government is planning on increasing its budget in order to update public infractures, shows this effect on the short term and long term Philips curve. Short term: since we know that the variable G will go up, and we can also safely assume that the C will also increase, the aggregate demand curve must shift to the right. This implies that there will be inflation accompanied with lower unemployment level. Long term: new public infractures implies cheaper transportation cost and more human capital. On the short term model, we can see that the Phillips curve shifts to the left, since the SRAS will shift to the right.   This increase in human capital (via new schools) will also shift the long term Philips curve to the left, implying that the natural rate of unemployment is now lower.

Short run Phillips curve: it represents a trade off between the level of inflation and the level of unemployment in the economy. Any change in the AD curve will produce a negative relationship between the inflation rate and unemployment rate. For example, an expansionary demand side policy will decrease the level of unemployment but increase the inflation rate (in the short run) and vice versa.  The inverse relationship between inflation and unemployment implies that the Phillips curve is downward slopping. It also shows that deflation is related to high unemployment, think about the AD curve shifting to the left.  A shift in AD is just a movement along the Phillips curve. When the SRAS shifts, the Phillips curve shifts in the opposite direction. Long run Phillips curve: the curve is inelastic, implying that there is no trade off between inflation and employment. Shift in SRAS to the right, the AD curve will shift to the left to reach, once again, LRAS. The impact on the short run Phil

  You are in charge of the government budget for the year 2021. You are told that schools and public roads need to be updated, and you estimate an appropriate budget in order to carry out the task. Describe what will happen in the short run to the economy, and what type of inflation do we see? Describe the supply side effect from this policy, explain what happens in the long run. Assume that there is no crowding out effect. First, note that updating public infractures, assuming taxes stay the same, will require an increase in government spending, which will also have an impact on the investment and consumption level in the economy (remember the spending multiplier?). Therefore, the aggregate demand curve will shift to the right. This will cause inflation (i.e positive change in the price level) and a higher output in the short-run.  Note that if we were to assume a large crowding out effect, the short run aggregate supply curve would shift to the left (increase in production cost). How

  Types of inflation: Demand pull inflation: caused by a rightward shift in the aggregate demand. The increased in consumption among consumers for a limited amount of goods forces prices to rise. When the economy is below full employment, an increase in AD does not drastically change the price level, since the economy is not fully using its resources (workers and machines) and can therefore easily increase production. When the economy is at full employment, an increase in AD causes a large increase in inflation, it becomes relatively more costly to increase production. Methods for reducing demand pull inflation: Contractionary fiscal policies: raising taxes or reducing the government spending, will put downward pressure on the aggregate demand, and thereby reduces its rightward shift. Contractionary monetary policies: Usually, the central bank is the entity that deals with inflation. It does so by increasing the federal funds rate through open market transaction, which decreases the su