Week 1:2 1

EC-111: British Economy

Recent Macro Economic Policy and Trends

Dr Catherine RobinsonF35, Richard Price

Office hours: Monday 10.30-11.30 and Thursday 9.30-10.30Appointments: c.robinson@swansea.ac.uk

Week 1:2 2

Picking up from yesterdayMacro economy policy targets may be defined as

the following variablesEmployment InflationBalance of PaymentsEconomic growthDebt

Policy leversFiscal policyMonetary policyExchange rate Incomes and pricing policies

Attendance1. Click 1 on your keypad and hold it down

until a appears.

Week 1:2 4

There are trade-offs Between inflation and unemployment

The Phillips Curve (1958)

Curbing government spending lowers earnings for public sector workers or reduce employment

Raising the exchange rate makes exports relatively more expensive and lowers (manufacturing) output

So how do you balance multiple objectives?

Instruments are not independent of one another

AND instruments have in the past become objectives Exchange rate instrument <<more when we

discuss the ERM>>

Week 1:2 5

The Phillips Curve

Each dot represents a year

1913-1948

As wages increase (inflation) unemployment declines

Week 1:2 6

Theory of Economic Policy

Tinbergen (1952)Fixed targetsTinbergen’s rule – there should be at least as many

instruments as there are objectives

Week 1:12 7

Two instruments, two objective case

O1

O2

Instrument 1 (eg monetary policy)

Instrument 2 (eg fiscal policy)0

I1`

I2`

Source: Griffiths and Wall, 2001

Movement away from the origin is an expansionary path

O1 is objective 1 (internal balance) at a particular target value

O2 is the objective 2 (external balance) at a particular target value

E

Assume O1 is full employment and O2 is balance of payments equilibrium

Week 1:2 8

Two instruments, 3 objective case

O1

O2

Instrument 1 (eg monetary policy)

Instrument 2 (eg fiscal policy)0

I1`

I2`

Source: Griffiths and Wall, 2001

O3

G

FE

now with O3 – assume it is economic growth (positively sloped)

Week 1:2 9

Flexible targets (Theil, 1956)

Pre-supposes that there is welfare loss associated with missing the fixed targets

Implicitly assumes that there is a social welfare function for the population

It then becomes a question of weighting

Week 1:2 10

Satisficing’ (Mosley, 1976)Policy makers are satisficing agents, influenced

primarily by recent levelsLooking at the 1946-71 period Mosley found that

any balance of payments deficit resulted in policy change – so that only zero or positive BoP was satisfactory.

Benchmark for unemployment was variable over time

Week 1:2 11

Which of these definitions best describes the term

‘satisficing’?1. Bureaucratic

organisations maximise profits

2. Bureaucratic organisations continually strive for the best possible outcomes

3. Bureaucratic organisations react only when welfare reaches an unsatisfactory level

Week 1:2

Britain in Context GDP – from national income accounting

Gives national wealth figures Need to convert to per capita measures for welfare index

Employment rates Activity rates

Inflation rates

Balance of payments

Exchange rates

Debt levels

Productivity – labour (and total factor) A more esoteric measure but designed to capture efficiency Is considered to be one of the better measures of standards of living

Who is our comparator? European Union members Frontier economies – USA Commonwealth

Week 1:2

Where can I find out what the UK looks like?

Economic Outlook from the OECD provides the most up to date national statistics in one place http://www.oecd.org/statistics/

Alternative data sources for international comparisons....Eurostat;

EUKLEMS (for industry comparisons)

Also, very useful is the Penn World Table https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php This has data from 1950-2010 on about 180 countries

National data source – Office for National Statistics www.statistics.gov.uk

Sub-national data – StatsWales

Alternatively – The Economist’s Big Mac Index

Week 1:2

Unemployment rates 1979-2010

0

5

10

15

20

25

France

Ireland

Italy

Spain

United Kingdom

United States

Week 1:1 15

Harmonised unemployment rates (% of civilian labour force)

Australia France Germany Greece Ireland Israel  (1) Spain United Kingdom

United States

Euro Area0

5

10

15

20

25

20102011

OECD outlook 2013

Week 1:2

Unemployment rates OECD comparisons

Canada Japan United Kingdom United States0

2

4

6

8

10

12

1960s 1970s 1980s 1990s 2000s

//

Week 1:2

British GDP in 2005 International Dollars (PPP converted)

0

500000

1000000

1500000

2000000

2500000

300000019

50

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Source: Penn World Tables, 2011

Week 1:2

Nominal GDP Growth (%change from previous year)

Source: OECD Outlook 2013

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

AustraliaFranceGermanyGreeceIrelandSpainUnited KingdomUnited StatesEuro areaTotal OECD

Week 1:2

Dollar exchange rates over time

0

0.5

1

1.5

2

2.519

5019

5219

5419

5619

5819

6019

6219

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

08

ex ra

te $

FRA

GBR

Source: Penn World Tables, 2011

Week 1:1 20

Week 1:2

Balance of PaymentsCurrent account as %GDP

-12

-10

-8

-6

-4

-2

0

2

4

1995199619971998199920002001200220032004200520062007200820092010 France

Ireland

Italy

Spain

United Kingdom

United States

Week 1:2

UK Imports and Exports over time

1960s 1970s 1980s 1990s 2000s0

5

10

15

20

25

Imports Exports

Debt: 1979-2011

Guardian Datablog, March 2013

Week 1:2

A tiny word of caution..Lies, damned lies and statistics...

It is important that we are comparing like with likeWhilst there is broad agreement on national

accounting practices, in reality, all national statistics agencies count differentlyRecent US treatment of computer software in the

capital account <<more on this with the 1990s ICT productivity paradox>>

Slightly pedantic, and easy to get bogged down in detail

Week 1:2 25

Macroeconomic performance

Week 1:2

Labour productivity growth GVA per hour worked

0

10

20

30

40

50

60

70

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

France

Ireland

Italy

United Kingdom

United States

Source: OECD Stats extract 2011

Week 1:2

GDP per person (2005$) 1950-2009

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

AUS

DNK

GBR

USA

FRA

Source: Penn World Tables, 2011

Week 1:2

GDP per hour worked Growth %pa (PPP converted $, 2005 prices)

Source: Penn World Tables, 2011

-6

-4

-2

0

2

4

6

8

10

12

14

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

GDP growth

Week 1:2

So what can be said about UK performance?

Labour productivity has traditionally lagged behind Considerable work has been devoted to improving the

proxies of skills and capital in recent years Are Britons less skilled than other nations? Do they invest less in capital, or the wrong sort of capital?

Sources of Growth literature also focuses on disaggregated national performance Is it down to the manufacturing/service balance in the

economy? The public/private sector balance?

We will explore these over the next few weeks

Week 1:2

Spending the next few weeks looking at why

• Historical context The decline of imperialism and the move from the

Commonwealth to Europe

Political context is crucial Economic policy is a big part of this

We live in interesting timesThe current financial crisis is the biggest since the

1930s and is causing economists (particularly) to re-evaluate some fundamentals…

Week 1:2

Next week...A lesson in UK (and European) economic history

When was national accounting invented?

What happened after WWII?

The birth of the welfare state

Through to the oil crisis of the 1970s and the ‘Winter of Discontent’

Week 1:2

ReferencesFor this week...

Griffiths and Wall (2011) 12th Edition – handy for the Tinbergen theory

Mosley (1976) Towards a Satisficing theory of Economic Policy’, The Economic Journal, 86(341), 59-72 (available on JSTOR)

O’Mahony, M. and C. Robinson (2007) UK Growth and Productivity in an International Perspective: Evidence from EUKLEMS, National Institute Economic Review, 200, April, 2007, 79-86

For next week if you want to look ahead...

Alford, BWE (1988) ‘British Economic Performance 1945-1975’