CFA Macro Section

EUR is the base

You can buy 1.09 USD for 1 EURO

X - exports

M - imports

S - A country’s savings

I - A country investments

T - Taxes

G - Government spending

1. Trade makes people better off when preferences differ

2. Trade increases productivity through specialization and the division of knowledge

3. Trade increases productivity through comparative advantage

Potential for greater income inequality

Loss of jobs in developed countries

- Structural unemployment (Most difficult to fix)

Tariffs - Tax on imports

Import quotas - restrict goods

Voluntary export restraint

Export subsidies

Embargoes - Trade Ban

extra profit producers make when supply is artificially limited by an import quota (C)

Value destruction

- Real Estate drops ( Highly leveraged)

- Equity markets fall

Currency devaluation

current account

- Measures the flow of g/s

financial account

- Measures the transfer of capital

capital account

- Records investment flows

CA = CA + FA

Debits

- Increase in real assets

- Increase in financial assets

- Decreases in financial liabilities

Credits

- Decreases in real assets

- Decreases in financial assets

- Increases in financial liabilities

Merchandise trade

- All commodities and manufactured goods bought, sold, given away

Services

- Tourism, transportation, engineering, business services

Income receipts

- Dividends, interest

Unilateral transfers

- One-way transfer of assets - Foreign direct aid

Capital transfers

- Debt forgiveness, migrants, gift / inheritance

Sale and purchase of non-produced, non-facial asset

- Rights to natural resources, sale/purchase of intangible assets

Financial assets abroad

- Official reserve assets

- Government assets

- Private assets

Foreign owned financial assets within the country

- Bonds

- Stocks

- MBS

Sp = private savings

I = investment

Sg = government savings

Oversees the fixed exchange rate agreements between countries

Help governments manage their exchange rates.

Provide short-term capital to aid the balance of payments

LENDER OF LAST RESORT

Help developing countries fight poverty and enhance environmentally sound economic growth

International bank for reconstruction & Dev

- Provide low interest rate lows (Policy-based lending)

Policy-based lending

Need to put certain policies in place if we loan you this money (Loans come with conditions)

Settles disputes

Regulates cross-border trade relationships globally

Implements, administers & operates individual agreements

Increasing profits

- New markets lead to increased sales

- Lower labor costs

Access to resources and markets

- Talent or raw materials

Intrinsic gain

- Information exchange, knowledge spillovers

Event risk

- Specific date, election, vote on new legislation

Exogenous risk

- Unanticipated risk that impacts either a country co-operative stand, or ability of actors to globalize

Thematic risk

- Evolve and expand over a long period of time

- Climate change, immigration patterns

Be readily acceptable

Have a known value

Be easily divisible

Have a high value:weight ratio

Be difficult to counterfeit

The real rate of interest is stable over time

Changes in nominal rates are the result of changes in expected inflation

Rnom = Rreal + π

π = risk

Capacity to create money

Banker to the government and other banks

Supervisor of the banking system

Regulator / supervisor of the payment system

Manage foreign reserves & gold reserves

Operation of monetary policy

Promote stable / sustainable growth by

Maintaining price stability (Single Mandate)

Maximizing employment (Dual mandate)

money that has value because the government has ordered that it is an acceptable means to pay debts

Not backed by gold ( Non-covertible )

Buy / sell gov securities from / to commercial banks

- Buy ( Expansionary )

- Sell ( Contractionary )

Raise - contractionary

Lower - expansionary

Independence from government

- Target rates without government influence

Credibility

- No competing incentives

Transparency

- They publish indicators they watch

Monetary policy- FED

- Rates / open market / reserve

Fiscal- US GOV

- Taxation/spending

Taxation - Wealth re-dist

Spending - raise ag demand

Cut sales tax

Cut corporate taxes

Infrastructure spending

Cut personal income taxes

Transfer payments (automatic)

- Welfare

Government spending (discretionary)

- Health, education, defense

Capital expenditure (Infrastructure)

- Science/innovation

Direct taxes from incomes

Indirect taxes - fuel/alcohol/tobacco/sales tax

Recovery

Expansion

Slowdown

Contraction

Economy going through a trough negative output gap starts to narrow

Activity levels are below potential but start to increase

Layoffs slow, business rely on overtime before moving to hiring. Unemployment remains higher than average

Inflation remains moderate

Economy is enjoying an upswing. Positive output gap opens

Activity measures show above average growth rates

Businesses move from using overtime to hiring. Unemployment rate stabilizes and starts falling

Inflation picks up modestly

Economy going through a peak. Positive output gap starts to narrow

Activity measures are above average but decelerating. Moving to below-average rates of growth

Businesses continue hiring but at a slower pace. Unemployment rate continues to fall but at decreasing rates

Inflation further accelerates

Economy weakens and may go into a recession. Negative output gap opens

Activity measures are below potential growth is lower than normal

Businesses first cut hours, eliminate overtime, and freeze hiring, followed by outright layoffs. Unemployment rate starts to rise

Inflation decelerates but with a lag

High credit avaiability on favorable terms

Often leads to asset price and real estate bubbles

LEVERAGE amplifies business cycles

- Extensive expansion / deeper recessions

Tight credit market, higher rates

Credit cycles tend to be longer, deeper, and sharper than business cycles

Determine direction in housing and construction markets

Affect the extent of expansion and contractions

- Credit cycle contraction + business cycle contraction = more severe recession

Foreshadow policy actions

Goods that can be used repeatedly over a period of time, such as cars and household appliances

Most effected by business cycles

New / Existing home sales (Demand)

Building Permits ( Supply - construction activity )

HPI - Housing Price index (Median home price)

Advocates no fiscal or monetary intervention

Business cycles are natural and efficient occurrences

Monetary and fiscal policy work in a delay, lag in implementation, lag in impact

Advocates for no fiscal or monetary intervention

Low rates and excessive credit create booms that create busts (recessions)

Limited fiscal role (Passive only - consistent policy over time)

If you increase MS too fast or slo you have inflation or a downturn

Very active role for fiscal policy in managing AD

Stock market

House prices

Retail Sales

30yr - 2yr, 10yr - 2yr

Building permits

Avg. weekly hours

Industrial production

Real personal Incomes

Payrolls

Avg duration of unemployment

Inventory / Sales

Avg prime lending rate

GDP

consumer debt/income

Comercial loans outstanding

Lagging indicator

Those without a job but looking

Frictionally unemployed

- Natural movement from job-to-job

A sustained rise in the overall level of of prices

The same amount of money purchases fewer goods

- Erods purchasing power and real incomes

Pro-cyclical with a lag

Measures price changes paid by domestic producers

- Fuels, farm products, machinery and equipment by raw materials

Helpful to bonds, leases, pensions, labors

- These may be indexed to some price index Eg. TIPS

The market value of all final g/s produced within an economy in a given period of time

The aggregate income earned by all households, all companies and the government within the economy in a given period of time

INCOME = EXPENDITURE

real GDP divided by the population

- Measures the standard of living in an economy

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Finds the inflation level

C + I + G + (X-M)

C = consumer spending

I = investment

G = government spending

X = exports

M = imports

I + ( G - T ) + ( X - M )

I = investment

( G - T ) = Fiscal balance

G = government spending

T = taxes

X = exports

M = imports

We have to borrow

AO = AI = AE

We must import

AO = AI = AE

Down, less demand to hold money, more investments

Up, more demand to hold money, less investments

As the interest rate increases the exchange rate goies up and makes domestic g/s more expensive in other countires

REDUCES EXPORTS

Makes foreign goods less expensive raising imports

the total amount of goods and services in the economy available at all possible price levels

Things that raise cost of production or expected profit margins for companies will cause the short run aggregate supply to shift to the left

Better human capital, technology, or natural resources

when aggregate output is below potential output

Corporate profits decline

Commodity prices decline

Interest rates decline

Demand for credit declines

when aggregate output is above potential output

Prices move up

Companies increase production

coporate profits rise

commodity prices rise

interest rates rise

demand for credit rise

Y = Output

L = Labor

K = Capital

A = Total factor productivity

a level of production in which the marginal product of labor decreases as the number of workers increases

Techology is the most important factor in helping economies overcome diminishing MR