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Exchange rates and inflation Monetary and fiscal policy

AGEC 340 – International Economic Development Course slides for week 14 (April 13 & 15) Macroeconomic Policy* . Exchange rates and inflation Monetary and fiscal policy. * If you are following the textbook, this is chapter 18. The U.S. economy.

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Exchange rates and inflation Monetary and fiscal policy

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  1. AGEC 340 – International Economic DevelopmentCourse slides for week 14 (April 13 & 15)Macroeconomic Policy* Exchange rates and inflation Monetary and fiscal policy * If you are following the textbook, this is chapter 18.

  2. The U.S. economy

  3. Dividing the pie: How is it used? How is it made? How is it earned? Click here for the latest figures: US data on supply US data on demand US data on income

  4. How does macroeconomics matter for trade? • What is “macroeconomics”, anyway? • How would it enter our diagrams?

  5. From week 3, the three-panel diagram…What if our currency falls in value? (e.g. more US$ per foreign currency) Our country (US) Int’l. Trade Rest of the world (ROW) Sexports Dimports Q (tons) Q (thou. tons) Q (tons)

  6. More simply, from week 4’s “small country diagrams”,When our currency falls in value… An importable good An exportable good D S D S Price ($/unit) Pt Pt

  7. How does agriculture fit in? • “Devaluation” or “depreciation” of the currency helps producers of any tradable, whether exported or imported • Agriculture is a major producer of tradables, using non-tradable land and labor; a low value of the currency helps farmers! • But note that currency depreciation hurts most consumers, who are net buyers of tradable goods, and net sellers of non-tradables…

  8. How has the U.S. exchange rate moved?

  9. The exchange rate and farm income

  10. We can think of this using a PPF and indifference curves Qty of other goods Foreigners are trading with us along the dashed line, at price = Pag/Pother Gains from trade Qty. of ag goods Qd Qs exports

  11. Adding up all tradable goods on the X axis… Qty of other goods (all non-tradables, e.g. most services) If total exports = imports (exactly balanced trade), then the slope of the “price line” here would be Pt/Pother Qty. of all tradable goods (e.g. farm products)

  12. Now we can see effects of macro policy:What if our country (e.g. the U.S.) borrows money from the rest of the world? Qty of other goods (all non-tradables, e.g. most services) Then we have “capital inflows” and a matching “trade deficit”; we consume more tradables than we produce: Pt/Pother is lower than if we did not borrow. Gains from borrowing (but note losses if/when we have to pay back!) Qd Qs Qty. of all tradable goods (e.g. farm products)

  13. …but now back to the textbook!

  14. What does the U.S government actually do? • The U.S. Government Printing Office publishes all our official documents, • e.g. for the budget, historical data is here: http://www.gpoaccess.gov/usbudget/fy11/ note especially: Receipts and Outlays as Percentages of GDP: 1930–2015 Receipts by Source as Percentages of GDP: 1934–2015 Outlays by Function and Subfunction: 1962–2015

  15. Some conclusions from macroeconomics • A key function of government is to stabilize the economy over time, by borrowing more in bad times and saving more during boom periods. • A key “macroeconomic” variable is the international exchange rate, which determines the prices of all internationally-traded goods relative to domestic ones. • To maximize long-run national income, governments should pursue freer international trade, and focus its interventions remedies for market failure. • Next week: foreign investment, migration and aid

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