1. introduction to economics...growth economics and fund-raising in international cooperation...

GROWTH ECONOMICSand Fund-raising in international cooperation

SECS-P01, CFU 9Growth Economicsacademic year 2019-20

Roberto Pasca di MaglianoFondazione Roma Sapienza-Cooperazione Internazionale

[email protected]

1. INTRODUCTION TO ECONOMICS

What is Economics?Economics is a social science which analize the economicagent’s choices and the interaction among the singlechoices.In other words, Economic Science studies the modalitythrough which individuals, organizations and enterprisesemploy scarce resources to produce various types of goodsand services, as well as the ways in which they aredistributed among the subjects (families, entreprises,institutions) to satisfy their present or future needs.Economics assume that the choices of single agents are:

• based on a criteria of rationality• aimed to maximize objectives of individual interest (profits, utility, etc.)

2019-20Roberto Pasca di Magliano Pagina 2

Partial list of topics (not enough)

The list (even if enriched) is never enough to descrive the contents the economic science.These topics are not the sole interest of economics as italso concerns: ² Other disciplines (sociology, law, etc.)² Social actors (enterprises, banks, trade unions, etc.)² Institutions (either local, national or international)

It is then necessary to specify the point of view and the method choosen by the economists while studying these

topics.


General Principles: Scarcity • «Scarcity of resources» reflects the fact that, in a givenmomenet of time, the resources are not available inunlimited quantities and that they can be usedalternatively in different systems of production.

• «Effetcs of scarcity» on societies, institutions,organizations as well individuals and companies concernsthe need to choose within a limited set of possibilitiesbetween objectives and scarce means to be used foralternative applications.

• Scarcity means that any resource acquires a value(euilibrium price and at the same time scarcity index)


General Principles: Reliable and complete information

Economic Science assumes that all the datarelative to the prices of any good and to theavailable technologies are both:–well known and complete–a-priori available both to the entreprisesproducing goods and to the consumersbuying them


General Principles conclusion: Scarsity and Full Information -> RationalityFundamental principles on which of economic analysis is based concernboth resource’s scarsity and perfect data information. So that it allows

that any choice will respond to the rationality. We already know that:

– Scarsity assumes that production resources are avallabile inlimited quantities and then they can be used alternatively indifferent production process

– Perfect information assumes that all the economic agents have fullaccess to data set and administrative information

Both scarcity and perfect information hypothesis imply a rationalbehaviour. Rationality assumes that economic agents’ behavior isable to evaluate costs and benefits following each available set ofalternative economic scenario.


Microeconomics – main topics

1. Consumer Choice TheoryHow a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases

2. Theory of the Production*How a firm chooses the inputs to be used and in which quantity, as wellas how it decides about production mix

3. Market StructureCharacteristics and degree of market power held by sellers and buyers

*The knowledge of the Theory of the Production is very important for betterunderstanding the Growth Theory


Macroeconomics – main topics1. National IncomeCountry’s GDP, national consumption, saving & investment, public expenditure, balance of payment. 2. EmploymentTypologies (structural, conjunctural), productivity, labour-force, rate of employment and unemployment, etc. 3. Political economy•Political policies (public investments, redistrubution measures, etc,)•Fiscal policies (taxes, transfers, etc.)•Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank


Macroeconomics– Evidence from Great Depression

Modern Macroeconomics is due to John Maynard Keynes, author of The General Theory of Employment, Interest and Money.

The origin was the Great Depression (Wall Street, 1929) that causes

a dramatic loss of output by the private sector resulting in a systemic

shock that causes serius social problems. Government spending

policies have been analysed to compensate lack of investments.

Main events:•Business lost income and reserve capital, so it had dismissed workers.

•Workers had less money to spend as consumers.

•Higher incomes people have a lower marginal propensity to consume their

incomes while people with lower incomes are inclined to spend their earnings

immediately

•The dramatic reduction in supply and then in demand lowered the rate of

growth. Spending should therefore target public works programmes on a

large scale to speed up growth to its previous levels.


Macroeconomics– Keynes revolutionKeynes argued that inadequate overall demand could lead to

prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components:consumption, investment, government purchases, and net exports (the differencebetween what a country sells to and buys from foreign countries). Any increase indemand has to come from one of these four components. But during a recession,strong forces often dampen demand as spending goes down.The reduction in spending by consumers can result in less investment spending bybusinesses, as firms respond to weakened demand for their products. This puts thetask of increasing output on the shoulders of the government. According to Keynesianeconomics, state intervention is necessary to moderate the booms and busts ineconomic activity, otherwise known as the business cycle.The Keynesian economy works along three major aspects:•Aggregate demand is influenced by many economic decisions—public and private•Prices, and especially wages, respond slowly to changes in supply and demand•Changes in aggregate demand, whether anticipated or unanticipated, have theirgreatest short-run effect on real output and employment, not on prices.


Macroeconomics– Aggregate DemandAggregate demand represents the total demand for final goods andservices in the economy (Y) at a given time and price level. It is the grossdomestic product, even called effective demand

Y = C + I + G + (X – M) < or = Pwhere:• C represents consumption (may also be known as consumer spending) =

basic consumption (a) + propensity to consume available income b (Y – T),• I represents investment (demand componet as inversly related to interest

rate)• G is government spending, composed by taxes (T) devoted to public

consumption and public investment• X – M represents net export (i.e. surplus or deficit of the balance of

payment) or viceversa• Y is national income• P is the maximum potential domestic production


Keynesian economy: main issues to rememberIn the short run, during recession, economy is influenced by aggregate demand (Y) that is lower than the maximum potential productive capacityof th econmy.Productive capacity of the economy is influenced by a many factorsaffecting production, investment, employment and inflation that are notalways arranged in the correct way.Keynesian economists argue that private sector decisions sometimes leadto inefficient macroeconomic outcomes which require active policyresponses by the public sector, in particular:• monetary policies by the Central Bank, manly oriented to the control of

the inflation rate;• fiscal policies by the Government, in order to stabilize output over the

business cycles.Keynesian economics advocates a mixed economy – predominantly privatesector - but with a role for government intervention during recession phase.


Macroeconomics– Aggregate Demand curve


Macroeconomics– Aggregate Demand, dept roleA Post-Keynesian theory of aggregate demand emphasizes the role of

debt, which it considers a fundamental component of the aggregate

demand. The contribution of change in debt to aggregate demand is

referred to by some authors as the credit impulse.

Aggregate demand is spending, be it on consumption, investment, or

other categories. Spending is related to income via:

• Income – Spending = Net Savings

• Re-arranging spending items and improving yields:

• Spending = Income – Net Savings = Income + Net Increase in Debt

In simple words:

spending capacity is represented on earnings plus borrowings. If you

spend $110 and earn $100, then you need to borrow $10; conversely

if you spend $90 and earn $100, then you have a net savings of $10,

or you can reduce your debt by $10.


Macroeconomics– Aggregate Demand, debt role implications

From the perspective of debt, the Keynesian prescription ofgovernment deficit spending in the face of an economic crisisconsists of the government net dis-saving (i.e. increasing its debt) tocompensate for the shortfall in private debt: it replaces private debtwith public debt.The alternative could be oriented to restart the private debt growth("reflate the bubble") or slowing its fall by appropriate public policiesdevoted to support private investment or by monetary policiesoriented to reduce interest rateDebt sustaibility (or service to debt) depends mainly on thecountry’s credibility in the world capital market. Credibility affects theevaluation of the effectiveness of both the State institutions and theeconomic policies. It is also affected by speculations purposes.


1. introduction to economics...growth economics and fund-raising in international cooperation...

Documents