Category: MacroEconomics

The Colonial Origins of Comparative Development: A Summary

Posted on by Rhys Williams

Acemoglu, Johnson and Robinson (AJR) attempt to measure the effects of institutions on income differences by introducing an exogenous source of variation in institutions to measure their differing outcomes. They begin by pointing out that the history of colonisation resulted in different institutions being formed: some countries received extractive institutions (whereby the coloniser would simply extract all resources but would not build proper institutions to promote growth and sustainable living) whilst others received inclusive institutions. This depended upon the ability for colonisers to settle, if a country was full of disease then the coloniser would not wish to live in this colony, but simply take as many resources as possible and then leave. [...]

Economic Growth: Where does it come from?

Posted on by Rhys Williams

One of the fundamental questions of economics is why are some countries rich and others poor? Why do some countries experience heavy growth which allows them to catch-up with the economic giants of the world, whilst others are relegated to the bottom and are unable to jump on the growth train? Is it due to luck, geography, culture or institutional factors? This article explains some of the different theories of economic growth, beginning with the Solow growth model (neoclassical model), before criticising such a model and suggesting that endogenous growth models have more to tell us about the growth phenomenon. We highlights the pitfalls of each model, but conclude that the main reason that incomes are different between countries is due to institutional differences. [...]

Did small scale firms inhibit Victorian Growth?

Posted on by Rhys Williams

Britain’s manufacturing firms have been accused of remaining family-run and small scale in the period 1850-1914, so ignoring the benefits of the large corporation evident in the USA. Discuss whether this represents a form of entrepreneurial failure by the owners of British firms.

Chandler identifies that corporation’s in America are vertically and horizontally integrated, invested in new technology and produced the latest industrial wares such as electricals, chemicals and automobiles. Britain was characterised by an “atomistic organisation of production”, according to Elbaum and Lazonick, with many small firms that were run by families. This is evidenced by the fact that in 1880s less than 10% of the manufacturing sector was accounted for by the largest 100 firms, the US figure was 22% (Hannah 1983). [...]

Negative Interest Rate Policy and the Zero Lower Bound

Posted on by Rhys Williams

Neoclassical Story of the Monetary Policy Transmission Mechanism

The traditional orthodox story tells us that interest rates affect the economy through a number of channels including (i) the investment channel whereby higher interest rates reduce investment, as it becomes more costly to invest thereby inducing firms to either invest with retained earnings or forego investment because expected profits will be too low at higher interest rates (ii) the consumption channel, which is similar to the investment channel, in that higher interest rates make borrowing more expensive and so higher rates mean consumers cut back on big-ticket items such as houses, cars and white-goods; furthermore higher rates not only make borrowing plans more expensive, but also make actual borrowing more expensive: those with loans already will face higher payments and may thus cut-back elsewhere (iii) the wealth effect stems from the effect of rates on asset prices; higher interest rates mean investors can get higher rates from putting their savings in bank accounts rather than in the stock market (and other financial assets) and so demand for assets falls causing a fall in their price (pushing up the return on that investment) which leads to a negative wealth effect as asset prices fall (iv) finally we consider the export effect, whereby a higher interest rate increases demand for a domestic currency (hot money flows in to take advantage of the higher rate) causing an appreciation which leads to fewer exports and hence lower aggregate demand. [...]

International Trade and Economic Growth

Posted on by Rhys Williams

Does international trade increase economic growth? In this context, what are the trade policies that have been followed by developing countries?

Standard textbook economic theory tells us that international trade benefits both parties in the trade, based on the gains from comparative advantage as laid out by David Ricardo. However, recent research into New Trade Theory suggests that trade may not always be beneficial, and there are examples when it could inhibit growth. This essay will examine when this could be the case and then relate this to the example of developing countries.

The Ricardian story goes that countries have comparative advantages in producing certain goods. [...]

Ricardian Equivalence

Posted on by Rhys Williams

Explain Ricardian equivalence, and discuss what implication it might have on the efficacy of expansionary fiscal policy.

Ricardian equivalence states that for a given level of government spending a change in taxes – financed by a deficit – will have no effect on the real economy. It is posited that individuals are forward thinking and rational and realise that a tax break today will have to be paid in the future. Therefore individuals won’t go out and spend this tax cut but will instead save it so that they can smooth consumption.

They will save ΔT.r (tax cut multiplied by real interest rate), acknowledging that the government will have to pay interest on its debt so future taxation will need to incorporate this. [...]

Europe 2020

Posted on by Rhys Williams

Within the overall Europe 2020 strategy, there will be difficult tensions to resolve between social and economic aims, as well as between qualitative progress and quantitative targets.

The impact of Europe 2020 on employment and the labour market will be pivotal, because it is the policy domain that straddles the boundary between the EU as an economic union and its wider social ambitions. Discuss.

The 2020 strategy is designed to promote “smart, sustainable and inclusive growth” with 7 key targets to; increase total investment in R+D to 3% of GDP; reduce greenhouse gas emissions by at least 20% compared to 1990 levels; increase the share of renewable energy to 20%; and move towards a 20% increase in energy efficiency; reduce school drop-out rates to less than 10% and increase the share of the population having completed tertiary education to at least 40%; lift 20 million people out of the risk of poverty and social exclusion; and raise the employment rate to 75% amongst 20-64 year olds. [...]

The Mundell-Tobin Effect

Posted on by Rhys Williams

This article explains the Mundell-Tobin effect by showing the relationship between the ISLM and ADAS models. The Mundell-Tobin effect states that nominal interest rates may not rise 1:1 with price levels, as the Fisher effect states.

The Fisher effect derives from Fisher’s identity of i = r + π where i=nominal interest rates, r = real interest rates and π=inflation rate (i.e. rate of change in price levels). Fisher believed that if π rose by 1 then i must also rise by one.

Mundell-Tobin came along and said that this wasn’t the case, because they believed that r, the real interest rate, would fall if inflation rose, meaning the overall effect would be that i didn’t rise on a 1:1 basis with inflation. [...]

Quantitative Easing

Posted on by Rhys Williams

What is Quantitative Easing and Why has it been used?

Quantitative easing is a policy introduced by the Bank of England to pump [to date] £375 billion into the economy. It works by the BofE purchasing government bonds (known as Gilts) off private and institutional investors which increases the price of government bonds, thus lowering the yield* and making it cheaper for the government to borrow. When first used it was seen as a form of unconventional monetary policy and was used because the central tool in a monetarists pocket – the use of interest rates to stimulate demand – was ineffective. [...]

Minimum Wages

Posted on by Rhys Williams

Why have statutory minimum wages become more prominent in recent decades? Why have they generally had little adverse effect on employment?

Prior to the introduction of the national minimum wage (NMW) in 1999 there had been no statutory wage floors since the abolishment of the Wages Councils in 1993 by the Conservative government. Growing wage inequality in both the D50:D10 and D90:D50 measure (which looks at the differing wage rates in the respective percentiles) was one of the leading reasons in the demand for some form of minimum wage to counter this growing inequality. Metcalf finds that the NMW reduced the D50:D10 ratio by 9 points if we include the effects of immigration. [...]