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Potential GDP is in line. Potential GDP and its Difference from Actual Domestic Product. Application of the size of potential GDP

One of the most important laws of the functioning of the capitalist market economy is macroeconomic instability, manifested in periodic fluctuations in total production, employment (unemployment) and price levels. Unemployment and inflation, being one of the most important macroeconomic problems, are the clearest manifestations of macroeconomic instability. At the same time, both unemployment and inflation have a strong impact on the socio-economic development of society as a whole, being the object of not only close attention of economists, but also of state macroeconomic policy.

Economic cycles. Potential and actual GDP. Reasons for economic fluctuations. Cycle phases.

Cyclical theories.

Unemployment and its forms. Measuring unemployment.

Natural unemployment rate... Okun's Law.

Inflation and its measurement. Inflation rate.

Demand inflation and cost inflation.

Inflation and real income. Influence of inflation on the redistribution of income and wealth. Influence of inflation on the volume of national production.

Stabilization policy and its methods.

1. Economic cycles. Potential and actual GDP. Reasons for economic fluctuations.

Economic cycles. Potential and actual GDP.

Economic cycle represents periodically repeated and successive ups and downs economic activity against the background of the general trend of economic growth.

Figure 4.1 shows a possible cycle pattern. Plot years on the abscissa. The ordinate is the volume Gdp as the most common indicator of economic activity. The straight line represents the trend of economic growth (trend), that is, it represents the dynamics of volume potential Gdp in time. The wavy line depicts the actual cyclical development of the economy, that is, it represents the dynamics of volume over time actual Gdp (in nominal terms).

Potential GDP - the maximum volume of real output that the economy is able to produce over a certain period of time (usually a year) with full and effective use all available factors of production and available technology.

Potential Gdp, therefore, determines the production potential of the economy and depends on the volume of the total labor force and labor productivity. (More on this in the topic "Economic growth").

Actual GDP - the volume of real output created in the economy for a certain period.

Level actual GDP determined by interaction aggregate demand and potential GDP ... If the level of aggregate demand is less than potential Gdp, then the level of the actual Gdp will be below potential Gdp, since it will be equal to the level of aggregate demand. With an increase in aggregate demand, the actual Gdp can reach the level of potential Gdp, but by definition cannot be higher than it (Figure 4.1A).

GDP actual potential GDP

GDP (nominal)

Gdp

potential GDP

actual GDP

Figure 4.1 shows the actual Gdp presented in nominal terms: deviations of the wavy line up from the trend mean inflation.

Reasons for economic fluctuations.

First economic cycle manifested itself in England, where in 1825 the first crisis of overproduction was noted (as the economic recession or recession). Since then, this phenomenon has been repeated periodically every 7-12 years. Since 1857, the cycle began to take on a global character, since this year the economic recession (recession) hit all the most developed countries. The deepest recession in the capitalist countries took place in 1929-1933 and went down in history under the name « The Great Depression » : the drop in production reached 40% in some countries.

The scientific theory of cyclical development was developed by K. Marx in "Capital" on the basis of the labor theory of value. The classics and neoclassicists did not recognize the natural character of cyclical development. They believed (many of their followers still believe) that recessions are caused by exogenous (that is, external to the economy) factors: wars, revolutions, but basically the wrong monetary policy of the state.

Since the time of Keynes, it has been argued that cause economic downturns are rooted in insufficient aggregate demand... Respectively cause of macroeconomic fluctuations(that is, the existence of a cycle), according to most modern economists, are fluctuations in aggregate demand, especially investment demand.

Types of unemployment
One of the clearest manifestations of macroeconomic instability is incomplete
employment or a large proportion of the unemployed in the total population.
Unemployment introduces uncertainty into economic development, affects a number of
important indicators such as GDP.
Unemployment is social economic process, which determines the proportion of the working-age population temporarily experiencing difficulties in finding a job.
Reasons for unemployment:
1) fluctuations in the demand and supply of labor in the labor market;
2) economic cycles, for example seasonal. The agricultural season covers summer and early autumn. At this time, the highest level of employment is observed;
3) technological innovations. For example, the advent of computers led to the fact that a number of people were left without work, their functions began to be performed by machines;
4) imperfect competition in the labor market, limiting the mobility of labor resources;
5) the desire of enterprises wishing to minimize production costs, to get rid of excess labor.
Experts identify the following types of unemployment:
1) frictional (natural, voluntary) is associated with the search and change of place of work;
2) structural, as a rule, is associated with profound changes in the structure of the economy: the emergence of new industries and the decline of the old, transformations in the structure of demand and the transfer of labor. Often, people who have worked for a long time in one place, have gained vast experience and have shown professionalism in a particular activity, find themselves out of work. The fact is that with the introduction of new technologies, the enterprise makes a demand for new specialties. And since the previous cadres are not sufficiently trained in this regard, and retraining takes a lot of time, they are simply fired. Therefore, this unemployment is forced;

3) latent unemployment occurs if a person is listed in the enterprise as a labor force, but does not work and, accordingly, does not receive wages;
4) cyclical unemployment arises from the crisis of the economy as a whole. This is the most dangerous type of unemployment, since, in addition to social contradictions, it also leads to a decrease in the value of real GDP.

Okun's Law:
If the actual level of unemployment exceeds the natural level of unemployment, the country has lost part of the GNP.
The calculation of potential losses of products and services as a result of rising unemployment is carried out on the basis of the law:
(y * -y) / y = b * (U-U *)
Where is the actual production
y * - potential GDP
U-actual level of unemployed.
U * -natural level of unemployed.
Okun's b-parameter, (3%)
natural unemployed-unemployed at full employment-rate unemployed at non-accelerating
inflation.
the natural level of unemployment reflects economically the feasibility of using labor, just as the degree of utilization of production capacities reflects the feasibility and efficiency of using fixed capital.
The difference between the actual natural and natural levels of unemployment characterizes the level of conjunctural unemployment.
According to this law, an increase in the actual level of unemployment by 1% above its natural level leads to a decrease in the actual GDP in comparison with the potential GDP.
Okun's Law works really well for the American economy, but other countries do not find such a strong relationship.

Full employment is always less than 100% of the working-age population. The unemployment rate at full employment is called the natural unemployment rate. , which the equal to the sum of the levels of frictional and structural unemployment.Therefore, the maximum possible level employment corresponds to the natural rate of unemployment.

GDP (GNP): actual and potential.
So far, we have only discussed various concepts of aggregate output, bearing in mind the characteristics of the actual level of output in the economy. However, it makes sense to pay attention to the concept characterizing "potential" output, by which we mean the output that would take place in the economy if all factors of production were fully employed. In what follows, this level of output will be called full-time output and denoted as. Actual output may differ from output at full employment, for example due to unemployment.
The task of macroeconomics is to explain both the deviations of actual output from potential output and to explain the long-term trend representing the dynamics of potential output.

Economic cycle represents periodically repeating and successive ups and downs of economic activity against the background of the general trend of economic growth.

Figure 4.1 shows a possible cycle pattern. Plot years on the abscissa. The ordinate shows the volume of GDP as the most general indicator of economic activity. The straight line represents the trend of economic growth (trend), that is, it represents the dynamics of volume potential Gdp in time. The wavy line depicts the actual cyclical development of the economy, that is, it represents the dynamics of volume over time actual Gdp (in nominal terms).

Potential GDP- the maximum volume of real output that the economy is able to produce over a certain period of time (usually a year) with the full and efficient use of all available factors of production and available technology.

Potential GDP, therefore, determines the productive potential of the economy and depends on the volume of the total labor force and labor productivity. (More on this in the topic "Economic growth").

Actual GDP - the volume of real output created in the economy for a certain period.

Level actual GDP is determined by the interaction of aggregate demand and potential GDP... If the level of aggregate demand is less than potential GDP, then the level of actual GDP will be lower than potential GDP, since it will be equal to the level of aggregate demand. With an increase in aggregate demand, actual GDP can reach the level of potential GDP, but by definition cannot be higher than it (Figure 4.1A).

GDP actual potential GDP

Okun's law

Okun's law(the law of the natural level of unemployment) - if the actual level of unemployment exceeds the natural level by 1%, the lag of the actual GDP from the potential is 2-2.5%.

In graphical form, this pattern is shown in Figure 6.2.

Rice. 6.2. Okun's law

In full employment, the volume of production is equal, and the rate of unemployment. If employment declines and unemployment rises, then the volume of production will also decrease. Thus, the graph reflects the decreasing dependence of the volume of production on the unemployment rate.

Potential GDP - the domestic product of the state, which can be provided in maximum dimensions with full use of available resources.

This state is called. There is another concept - real GDP, for the formation of which producers create and sell the required amount of products for a certain time at different price levels. When analyzing, it is customary to distinguish between long-term and short-term periods. So, subjects in the long run can be described by the classical model. A free market without government intervention automatically ensures the use of resources in production, which leads to the achievement of potential GDP.

The value of potential GDP is determined depending on the value of available technologies and resources, but may not depend on That is why the curve aggregate supply long-term nature is located vertically.

Potential GDP is subject to the law of money neutrality. Thus, the vertical direction of the curve indicates the degree of provision of output at the level of such GDP by the forces of the market and competition in the long run. At the same time, the price level can have different meanings and depend on the volume Money in economics. And the other side of this economic law - in the presence of high prices, high prices are traced, and in long-term planning it affects both prices and

With an increase in the amount of resources in the economy, the development of technical progress is traced and, accordingly, the potential GDP increases, and its curve on the graph should shift to the right. But with a reduction in the volume of resources or technical regression, everything should be the other way around.

A significant number of economists believe that GDP (actual and potential) can reflect a long-term period in macroeconomics. At the same time, deviations of the first type of domestic product from the second are quite successfully eliminated by the market.

However, modern economists have concluded that there is a short period (an example would be a quarter) in which the classical approach to money neutrality cannot work. In other words, any changes in the volume of the money supply have a significant impact on both the price level and potential GDP. Thanks to this statement, a new concept has appeared - short-term GDP, for displaying the dynamics of which the aggregate supply curve is no longer vertical, but rather horizontally located.

Such a curve reflects the possibility of increasing the ability of business entities to produce products when a certain level prices. This fact is confirmed in the presence of noticeable lags of actual GDP from its potential level. In other words, the domestic economy is not working at full capacity.

Macroeconomics, unlike microeconomics, studies the economy as a whole, and not the behavior of individual agents.

And the object of close attention of macroeconomics is generalizing indicators - macroeconomic aggregates:
gross domestic product,
unemployment rate,
inflation rate,
condition state budget,
the state of the country's balance of payments,
the rate of economic growth.

But the same cannot be done without objects, therefore four generalized economic agents are introduced:
Households: sell resources - they are factors of production, consume part of the income received, save;
Entrepreneurial sector: buy production resources, produce, sell finished products are investing; (the latter means turning into additional capital of household savings!);
Public sector: provide public goods such as free of charge (defense, law and order, industrial and social infrastructure services);
Abroad: exchanges goods, services, capital and national currencies.

Part 1. Definition of GDP

Now you can go to the GDP.
The definition of GDP will be given by formulas.
GDP can be calculated using three methods:

GDP = National Income (= wages + rents + interest payments + corporate profits) + depreciation + indirect taxes - subsidies - net factor income from abroad,

GDP = Final Consumption + Gross Capital Formation (investment in a firm (purchase of machinery, equipment, inventory, place of production)) + Government spending + Export - Import

This formula has a common letter notation:

Y = C + I + G + Xn;

Xn = Ex - Im.

The formula "exactly" describes generalized economic agents.

GDP = sum of value added (value added of a firm = income of a firm - the intermediate cost of producing a good or service)

I will also give one more formula for value added, expressed in terms of output (the output is estimated by the state statistics authorities):

Sum of value added = total output - total value of intermediate products

GAME WITH FORMULAS

I would like to note that on the basis of these three equalities it is possible to compose a "polynomial equality" and determine some macroeconomic variables through others.

GDP =

= wages + rents + interest payments + corporate profits + depreciation + indirect taxes - subsidies - net factor income from abroad =

= Final Consumption + Gross Capital Formation + Government Expenditures + Exports - Imports =

= total output - total cost of intermediate output =

= total value added.

Many formulas can be derived from this polynomial equality.
For example, we can find out what the added value consists of.
Or, for example, get the formula for import:

Imports = Final Consumption + Gross Capital Formation + Government Expenditures + Exports - Total Output + Total Cost of Intermediate Products

A very useful formula!

HOW TO MEASURE GDP

Since GDP cannot be measured in physical terms, it has to be measured in money. But prices change, inflation or deflation is present, and because of this, we have to use the concept of nominal and real GDP.

The relationship between the indicators of nominal and real GDP is visible using the formulas:

Nominal GDP = Real GDP * Price Index

Nominal GDP Index = Real GDP Index * Price Index

The price index is a coefficient that reflects the change in the price level in the reporting year in comparison with the base one. The price index used to link nominal and real GDP is called the GDP deflator.

Of course, the method of calculating the price index is a separate conversation, no less capacious than the discussion of the content of GDP. But let us stop and accept that we know the GDP deflator with a fairly acceptable accuracy.

EXAMPLES

1.
Let the GDP deflator = 1.05, the nominal GDP index = 1.04.
Let's calculate the real GDP index and estimate whether the real GDP has grown.

Answer:
Real GDP Index = Nominal GDP Index / Price Index = 1.04 / 1.05 = 0.99
Real GDP fell 1%.

2.
Nominal GDP in this year was 216. The GDP deflator is 1.2 in relation to the previous year, when the GDP was 200.
Question: How much has real GDP changed in comparison with the previous year?

Answer: Real GDP = Nominal GDP / Price Index = 216 / 1.2 = 180. In the last (base year), nominal GDP is equal to real. Real GDP fell by 20 (10%).

3. A more "everyday" example. How the bun that the person intends or has already bought is counted.

Answer:
The bun is included in the GDP at the moment when it is recorded in the accounting records at the finished goods warehouse (debit on account 40). (Let's assume that the data on the posting in the finished goods warehouse goes to the statistics authorities immediately).
This bun is fixed as part of the INVESTMENT of firms.
But when someone buys a bun, it is debited from the investment and recorded in the final issue. Then it doesn't matter who eats the bun - man, cat or pigeons. If a person resells the bun by holding it in the nightstand, then it will no longer be taken into account in the GDP. Just for fun: second-hand buns are not counted in any way!

Part 2. The supply-demand model from the point of view of the characteristics of GDP

Let's combine all markets for individual goods into a single common market. This means the union of all prices into a single price level, and all industries - into the aggregate volume of production - the real gross domestic product (GDP).
Let's build a model "aggregate demand - aggregate supply" (model "AD-AS").

Note... AD - aggregate demand = aggregate demand. AS- aggregate supply.

On the X-axis, we plot the real gross domestic product in rubles, and on the Y-axis — the general price level in relative units or the price index — the GDP deflator. In this case, we will use the notation Y for real GDP, and P - for GDP deflator... (Game confusion, but what can you do ...)
So.
Aggregate demand is the real GDP that all buyers would be willing to purchase during a given time, given different levels prices.
From here we will immediately formulate:

Law no. 1
The law of aggregate demand: the lower the price level in the economy (P), the greater the amount of demand of all consumers for real GDP (Y).

That is, when prices go down, we move strictly along the curve and ... GDP increases!
This law is associated with an equation from the quantitative theory of money:

where M is the money supply in the economy,
V is the number of turnovers of the money supply during a given time,
P is the price level in the economy,
Y is real GDP.

And from this equation, aggregate demand is obtained

Law No. 2
The aggregate demand equation is defined as Y = MV / P

It follows from the aggregate demand equation (note - from the equation! And not from economic life!) that the higher the price level, the less the number of goods and services that are asked for the given values of M and V. That is, the less demand.
This explains logically and economically: when the price level rises, more money is required for each transaction; if the money supply is constant, the number of transactions will decrease.

This is how the following law on non-price factors of demand is formulated

Law no. 3
The increase in money in the economy, as well as in the speed of their circulation, leads to the fact that economic agents begin to acquire more goods at all prices, and the AD curve shifts to the right. And vice versa.

Curves AD1 and AD2 - are obtained as a result of a shift as a result of non-price factors. This can be explained as follows. Let's say the demand curve is Pareto-like:

If the price changes, then we are simply moving along a curve.
Non-price factors change the xm variable. Because of this, the Pareto curve shifts left or right.
True, there is also a parameter k, which corresponds to the index of inequality, but will not touch this parameter so as not to confuse the question.

In the general case, non-price factors lead not so much to a shift in the curves, but to a change in the shape of the curve!

Changes in the money supply in the economy and the velocity of money circulation are reflected in spending.
But as previously noted, aggregate demand can be represented as the demand of generalized macroeconomic agents. That is

Y = C + I + G + XN.

Aggregate demand breaks down into:
private consumer spending (C);
investment costs of firms (I);
government spending (G);
foreigners' expenses - net exports (XN).

Now attention. Changes in prices lead to movement along the AD curve.
But a change in the costs of one of the agents leads to a shift in the AD curve!
In this case, INCREASE - RIGHT.
In this case, REDUCTION - LEFT.
This must be remembered if there is no desire to think every time where something is going. (For example, using mnemonics: walking to the left is bad, lowers ...)

Subsequent analysis takes place at the agent level.

Consumer demand
For example, consumer demand from private consumers, i.e. households (C) depends mainly on:
total income all consumers or national income;
accumulated wealth;
the amount of consumer debt;
consumer expectations;
taxes;
transfers;
interest rate.

These are rather "transparent" factors, we will not dwell on the interpretation of factors, although there are some peculiarities here, and you can write a separate note on each factor about its impact on demand and GDP.

Investment demand
Less transparent investment demand of firms, which depends on:
real interest rate;
national income;
expected returns on investment;
taxes from enterprises and subsidies paid to them.

It is difficult to calculate the real interest rate.
The nominal interest rate (i) is the rate at which the borrowed funds in the financial markets. Real Interest Rate ® is the change in the purchasing power of interest income.
The relationship between nominal and real interest rates is described by Fisher's equation:

r = i - pi,

where pi is the inflation rate.

Note. Note that Fisher's equation describes the ratio of the bets. Although for some reason sometimes the Fisher equation is called the equation of the quantitative theory of money. This can lead to confusion if the context is not clear what is being said.

Now we can outline the main statements regarding investment demand:

Law no. 4
If the real rate falls, then investment demand rises.

Law No. 5
If the real rate is constant and the national wealth grows, then investment demand grows.

Law # 5 is clear. Wealth grows, demand grows, factories need to be built!
It is also obvious that taxes reduce investment, subsidies increase. The expected profits are and stock market is growing, and so is the present value of the investment.

Government spending
Usually, before elections, government spending increases. In macroeconomic models, government spending is usually present as an exogenous (external, predetermined) parameter.

Foreigners demand
Net exports (XN) - represents the difference between a given country’s exports (X) and its imports (M):

Accordingly, the larger the export and the smaller the import, the larger the net export.
Net exports depend on three main factors:
national income in other countries;
national income in our country;
exchange rates.

All About the Demand Curve ------

Now note that in order to predict the GDP, denoted by the letter Y, you need to use

three variables from the quantitative formula of money (M, V, P), in particular, describing the actions of the Central Bank (M) and the excellence of the banking system and settlements (V)
at least 16 variables describing the demand of macroeconomic agents.

For now, for us, all these variables are independent and their number needs to be reduced.
It turns out that the first variable that they try to turn from "independent" to dependent is the variable P - the GDP deflator
And it is done using the aggregate supply curve (AS curve).

Part 3. Potential GDP

The aggregate supply (AS - aggregate supply) is the real GDP that all producers are willing to produce and sell during a given time at different price levels.

To analyze the AS curve, it is necessary to distinguish between short-term and long-term periods in macroeconomics.

The behavior of the economy in the long run is described by the classical model: free market automatically, without government intervention, ensures the full use of production resources, respectively, the achievement of potential GDP.

Potential GDP is the maximum achievable GDP with the full use of all available resources ("full employment" state). Full employment allows for some reserve of resources, incl. and unemployment ("natural unemployment rate").

Potential GDP (Y ") depends on the amount of available resources and technology, but does not depend on the price level. Therefore, the long-term aggregate supply curve (LRAS - Long-Range Aggregate Supply) is vertical.

Money neutrality law

1. The vertical nature of the aggregate supply curve suggests that the forces of the market and competition in the long run ensure output at the level of potential GDP, while the price level can be any and depends on the amount of money in the economy.

2. With a high emission of money, prices will be high and vice versa, and in the long run, the money supply affects only prices, but not the volume of production.

If the amount of resources in the economy increases or technical progress takes place, then the potential GDP increases, and the LRAS curve shifts to the right. With a reduction in the amount of resources or technical regression, everything happens the other way around.

Most modern economists believe that classic model correctly describes the long-term period in macroeconomics. The classics said that deviations of the actual GDP from the potential level would be quickly eliminated by the market.

But economists of the twentieth century came to the conclusion that there is short period(for example, a quarter) when the classical principle of money neutrality does not work. That is, a change in the money supply affects not only the price level, but also the real GDP.

This is how the concept of short-term GDP appeared, for which the aggregate supply curve is definitely not vertical. And for example, inclined or even horizontal.

This curve was designated as SRAS (short-range aggregate supply).

What the representations of different schools look like, well drawn on Wikipedia

A horizontal curve means that firms are able to increase output at a given price level. This is possible if the actual GDP significantly lags behind the potential level (the economy is underload).

Indeed, if the economy has a significant amount of unused resources, then firms can attract additional resources without raising their prices. For example, the unemployed agree to work for whatever price they are offered.

Thus, the cost of factors of production does not change. Then the question is, why should prices change? If you raise the price, everyone will buy from a competitor!

The positive slope of the short-run aggregate supply curve means that if prices rise, firms will increase output.

Both horizontal and inclined supply lines can move up or down under the influence of changes in labor productivity, due to changes in the cost of materials.

Higher prices for electricity and gasoline will shift the supply curve.
An increase in prices causes the curve to move upward, and a decrease - to move the curve downward.

Each of the schools, classical, Keynesian and modern, is convincing in some way and in some way in its reasoning about the nature of the supply curve. Therefore, there are attempts to "reconcile" all schools in one schedule. Namely, it is argued that for a different combination of factors, the economy behaves first according to the Keynesian model, then according to the modern one, and then becomes classical.

Actually, the view of the supply curve should look like it is shown in the figure below.

Specifically, you can see it from McConnell and Brue in Economics. So, with low production volumes, the employment of resources is low and an increase in supply can be obtained without increasing prices for resources. This characterizes the horizontal portion of the supply curve. If all resources are occupied, then no increase in prices will lead to an increase in production. The part of the supply curve corresponding to the full employment of resources is vertical (D. Ricardo, J. Mill, A. Marshall, etc.). When approaching full employment, production growth is associated with the emergence of "bottlenecks", a shortage of certain types of resources, which can cause an increase in resource prices and a general rise in prices. This determines the upward character of the intermediate segment of the aggregate supply curve.

The price change is reduced to moving along the curve. The shift of the curve (up-down, left-right) is determined by:

1. Changes in resource prices.
2. Changes in labor productivity (usually associated with the influence of scientific and technological progress).
3. Taxes and subsidies, government regulation economy.

BUT...
in my opinion, using a "synthetic" supply curve is wrong. Some effects are lost, and what is more important, the features of short-term and long-term are lost in explaining the behavior of prices, supply and demand.

Equilibrium

Earlier we wrote about the demand curve. Let us superimpose the demand curve on the supply curve. By the way, this will add one of the free variables. And of course this variable will be the price.

The drawing is taken from Wikipedia, and this drawing really depicts equilibrium. Demand, short-term and long-term supply are balanced. In the long run, macroeconomic equilibrium is achieved at the intersection of the AD and LRAS curves. In this case, the equilibrium GDP (the point of intersection of AD and SRAS) is equal to the potential GDP (the point of intersection of AD and LRAS). On the other hand, the point of intersection of these curves sets the prevailing price level in the economy (P). Of course, it can be the balance of poverty, the balance of wealth, the balance of the economy dependent on raw materials, the balance of the export-dependent economy, but nevertheless it is a balance!

So. To achieve macroeconomic equilibrium, it is necessary that the aggregate demand be equal to the aggregate supply.

Important findings
1. In the long term, the level of social production is determined by the potential GDP.
2. Potential GDP depends on
- the amount of resources available in the economy:
- - labor,
- - material,
- - natural;
- the efficiency of resource use, determined by education and technological progress.

Based on these findings, the long-term policy of stimulating economic growth presupposes
A - creating optimal conditions for population growth,
B - capital accumulation
B - the introduction of scientific and technical innovations into production.

And what do we have in Russia (2010)? Here's what's on the buzz:
A - to stop the decline in the population, to stimulate the birth rate, maternity capital ...
B - modernization, removal of bureaucratic obstacles in the way of small business, the fight against corruption (to some extent) ...
B - innovation, Skolkovo, Rusnano ...

The government is building policies in accordance with economic theory... Another thing is that it may not work out the way we want - but this is already a question of efficiency and a question of managerial competencies.

The ability to use knowledge is important for the growth of potential GDP.

"Some of the most significant steps in the mental development of humankind are based not just on the acquisition of new knowledge, but on the acquisition of new administrative ways to use what everyone already knows."
Mathematician Seymour Papert

Again, Alan Greenspan writes (“The Age of Shocks: Problems and Prospects of the World Financial System.” - M .: Alpina Business Books, 2008) that market capitalism on a global scale requires more and more highly qualified skills as one new technology is replaced by another. Since the original level of human intelligence is unlikely to have increased since the days of Ancient Greece, our future success will depend on the replenishment of the heritage of knowledge accumulated over many generations.

Greenspan has this formula

GDP = Population * Labor productivity

The population size depends on the ability to reproduce, but labor productivity depends precisely on scientific and technological progress, on the ability to use knowledge.

As we can understand from the last formula, GDP is influenced not only by how many of us, but also who we are!

But I want to draw your attention to the fact that the population "plays" on both sides. Not only on the supply side, but also on the demand side. It follows from this that the size of the population, both in general and of the labor force, is an exogenous factor, an exogenous variable that determines long-term behavior. But not short term.

Thus, we actually "killed" one variable - prices, but we introduced one more unaccounted variable - the population in general and the able-bodied population in particular!

What if the LRAS long-term supply curve shifts?

Part 4. Tasks for aggregate supply and demand

Dry texts about aggregate supply and demand need to be explained somehow before moving on to an even drier text.

1. Will lower real interest rates stimulate investment growth?

Yes, because the lower the real interest rate, the more loans firms can borrow, the less investment.
On the other hand, a fall in the real interest rate leads to an increase in personal consumption spending and investment, and therefore to an increase in aggregate demand. AD curve shifts to the right:

2. Higher prices for basic productive resources are pushing the short-run aggregate supply curve upward?
Yes, because an increase in prices for basic production resources leads to an increase in costs per unit of output. As a result, firms raise prices by producing the same volume of output, which shifts the short-run aggregate supply curve upward.

2.1. What will happen if the oil price falls sharply? (Dramatically - an important clarification!)

Since oil is a productive resource, a sharp decrease in oil prices leads to a decrease in producers' costs per unit of output. This shifts the short-term aggregate supply curve downward:

If the AD curve does not shift, we will see real GDP growth along with a decline in prices.

2.2. The increase in customs duties on imports makes our goods more competitive compared to foreign ones. As a result, our net exports are growing, and, accordingly, the aggregate demand for our products - the AD curve is shifting to the right:

In the short run, real GDP growth will be combined with rising prices.

2.3. Raising wages (usually here they talk about strengthening the trade union movement) leads to an increase in producer costs per unit of output. This shifts the short-term aggregate supply curve upward:

If the AD curve does not shift at the same time, we will observe a rise in prices along with a decline in real GDP (stagflation).

3. Does the aggregate demand curve shift to the left by the decline in the money supply in the economy?

Yes. A decrease in the money supply in the economy leads to a decrease in aggregate demand - the aggregate demand curve shifts to the left.
A reduction in the money supply in the economy leads to a decrease in aggregate demand - a shift of the AD curve to the left (this is typical for the "Keynesian" regime of the economy):

Since prices are resilient to declines, we will see real GDP fall at the same price level.

4. What happens if government spending rises?

Well, let's say, to education! Since government spending is an integral part of aggregate demand, aggregate demand will grow, and the AD curve shifts to the right:

As a result, we see real GDP growth in a short run coupled with price increases. But the growth in aggregate demand will turn out to be greater in comparison with the sum of expenditures due to the effect of the multiplier of autonomous expenditures.

5. The economic crisis in the CIS countries, what is it leading to?

Leads to a decrease in demand for a product from any CIS country in the rest of the CIS countries. As a result, exports will decrease, which means that the aggregate demand for goods will fall, and the AD curve will shift to the left:

But a drop in aggregate demand in a short period may not affect the costs of firms per unit of output, which is reflected in the graphs. In this case, we will observe a decline in real GDP at the same prices. The SRAS slope is easy to interpret and therefore omitted.

6. How does devaluation affect GDP?

The depreciation of the ruble against the dollar and the euro makes our goods cheaper relative to foreign ones, which leads to an increase in Russian exports and a decrease in imports, i.e. to the growth of net exports. Net exports are part of aggregate demand. Its growth shifts the AD curve to the right:

In the short run, real GDP growth will be combined with rising prices.

7. Impact on potential GDP.

7.1. An aging population means a decrease in potential GDP if there are not enough people for manufacturing and services. This leads to a shift of the long-term aggregate supply curve to the left from LRAS0 to LRAS1:

If the money supply in the economy remains the same, then in a long period we will observe an increase in prices along with a fall in real GDP.

7.2. Impact of scientific and technological progress on GDP

Scientific and technological discoveries lead to an increase in potential GDP, which means a shift of the long-term aggregate supply curve to the right from LRAS 0 to LRAS 1:

If the money supply in the economy remains the same, then in the long term there will be a fall in prices along with an increase in real GDP.

8. OBJECTIVE

Last year, the potential GDP was 100 units, and the aggregate demand curve was set by the equation Y = 150-5P. This year, potential GDP grew by 5%, and the aggregate demand curve took the form: Y = 160-5P. How many percent have prices increased if last year and now the economy is operating at full employment.
ANSWER
The initial point of long-term equilibrium can be calculated by substituting last year's potential GDP into the aggregate demand function:

150-5P = 100.
Hence P = 10.

The price level of the last year was found.
The growth of potential GDP by 5% (up to 105 units) causes an increase in aggregate demand. AD curve and LRAS curve are shifted to the right.
We calculate the new point of long-term equilibrium by substituting the potential GDP of the current year into the new function of aggregate demand:

160-5P = 105.
Hence P = 11.
Hence, prices have increased by 10%.

Graphically, it looks like this:

9. If the economy is in a state of short-term equilibrium, are all resources fully utilized?

It is necessary to look at how the short-term and long-term GDP are located. In a short-term equilibrium, the equilibrium GDP may well be lower than the potential one, which means an incomplete use of production resources.

Part 5. Real and Potential Equilibrium of GDP and Aggregate Demand

Potential GDP vertical line - corresponds to full capacity utilization.

The figure below combines two different situations, two different potential GDPs. But such an unjustified combination of two different economies on one graph gives a very clear picture of two different states of the economy.

LRAS - Potential GDP (long-term view) - aggregate supply in the long-term aspect or potential supply.
SRAS - Real GDP (Short Term View) - Aggregate supply in the short term.
AD is the aggregate demand.
P - price index.
Y - GDP.

The intersection point of SRAS and AD is equilibrium GDP.

As you can see, the point of equilibrium GDP does not coincide with the potential GDP! If the point of equilibrium GDP is to the right of the potential GDP, we have an overheating of the economy, if to the left - a recession.

Suppose the economy is initially in a state of short-term equilibrium at point E0. At the same time, the equilibrium GDP (Y0) turned out to be lower than the potential one, i.e. the economy underutilizes the available resources - it is going through a crisis.

Let the aggregate demand rise for one reason or another - the aggregate demand curve has shifted from position AD0 to position AD1. As a result, the macroeconomic equilibrium corresponds to the point E1, and the equilibrium GDP reaches its potential level (Y1) at more high level prices (P1).

If aggregate demand continues to rise, the AD curve will shift to AD2. In the short run, prices will rise to P2, but producers will respond to increased demand by increasing output (from Y1 to Y2). The point of short-term equilibrium will be point E2.

However, this balance will not last long. Since the equilibrium GDP exceeds the potential one, the economy is overloaded. This means that resources become scarce, their prices rise, and producers' costs increase. And the volume of issue is THE SAME!

And what?

The short-term aggregate supply curve is gradually beginning to shift upward from SRAS0 to SRAS1.
Until the economy reaches the equilibrium point E3, which means a return to potential GDP at a higher price level (P3).

Here's a story.

We examined the dynamics of migration of equilibrium GDP to one degree or another.
But what causes the equilibrium GDP to move back and forth?

Part 6. Autonomous spending and GDP growth

So, we are trying to understand how and why the GDP changes, which variables need to be influenced. For this, all the variables that we identified in "Part 2" Supply-demand model for GDP ".

So, we must divide all the variables into dependent and independent.

And now, among the group of variables that are defined as "expenditures", independent expenditures in macroeconomics received a specific name - "autonomous expenditures".

So, back to the past.
Aggregate demand breaks down into
household consumption expenditures,
investment costs of firms,
government spending,
foreigners' expenses are net exports.

A change in any of these components of aggregate demand changes aggregate demand.
But (!) The aggregate demand changes by a large amount in comparison with the initial change in expenditures. And if the short-term aggregate supply curve is horizontal, the growth in aggregate demand entails the same growth in GDP. (!)

Why is it so?

Suppose that the firms decided that the crisis was over and increased their investment costs - they bought new equipment worth 100,000 rubles.
The money has been spent and the equipment has been shipped.
Thus, the increased demand of firms initially caused an increase in aggregate demand and GDP by the same 100,000 rubles.
But the process does not end there.
Let us assume that machine builders receive these 100,000 rubles. in the form of their income - wages (or dividends).
What will they do with them?
They can partly postpone it for other times, and spend the rest.
The share of expenses in the additional income is called the marginal propensity to consume. Marginal propensity to consume - very important indicator... Governments are constantly trying to influence him. But we will not yet - how and for the good of what they are trying to influence this indicator, but we will move on to the definitions.

The marginal propensity to consume is designated by the MPC.

Calculation formula:

The marginal propensity to consume (MPC) shows how many rubles consumer spending (ΔС) increases with income growth (ΔY). Usually they say - one ruble.

On the other hand, the marginal propensity to consume shows how much of the additional income people consume. Accordingly, MRS is a fractional value that varies from zero to one.

Let the marginal propensity to consume be 0.5.

This means that machine builders save half of their additional income, and 50,000 rubles for the other half. - spend (taxes are not taken into account, so as not to litter the example).
It turns out that the aggregate demand increases by another 50,000 rubles.
This money will be received by other industries and the GDP will increase by 50,000 rubles.
But in other industries, the received 50,000 rubles are used the same.
Half will be saved, half will be spent (marginal propensity to consume - 0.5 - according to the conditions of the problem).
So we get another 25,000 rubles of growth.
But half of the 25,000 rubles will again be spent.
Etc.

Thus, a chain of relationships arises:

expenses - production - income - expenses again - additional output - additional income etc.

Thus, the initial impulse in demand causes a significantly larger increase in aggregate demand and GDP.

In the example, aggregate demand increases by:
100,000 + 50,000 + 25,000 + 12,500 + 6,250 + ... = 200,000 rubles.

In the example, the root cause of the rise in aggregate demand was an increase in investment spending. And what if the state first increases the spending? or households? or will foreigners want to buy more of our products?

The expenditures of all consumers that change regardless of changes in GDP are called autonomous.

Changes in autonomous spending are the root cause of subsequent changes in aggregate demand, income and production.
The final increase (decrease) in aggregate demand and GDP due to the initial increase (decrease) in autonomous spending is called the "autonomous spending multiplier effect".

The multiplier of autonomous costs (m) is the coefficient,

Shows how many rubles change in aggregate demand and GDP (ΔY) when autonomous expenditures (ΔA) change by 1 ruble.

Note. ΔY I labeled as GDP. In textbooks it is usually used - national income... Therefore, be careful!

In the above example, the increase in autonomous costs (investment costs) by 100,000 rubles. led to an increase in aggregate demand and national income by 200,000 rubles, respectively, the multiplier is 2.

The denominator of the multiplier is a fraction, which means the multiplier is always greater than one.

The magnitude of the multiplier depends on the marginal propensity to consume: the higher it is, the greater the multiplier.

And now, knowing the multiplier, we can calculate both the increase in aggregate demand and GDP growth for a given initial increase in autonomous spending:

So we have a "what ... if ..." production rule. That is, we can now predict GDP growth using the formula (*), if we really know the list of autonomous expenditures. What variables are suitable for the role of autonomous expenditures?

Part 7. Autonomous expenses - budget and taxes

In Part 6, we determined that in order to estimate changes in GDP, we need to find independent variables. We now know that such explanatory variables include offline costs. Consider now two types of autonomous spending - government spending and taxes.

Isn't it topical. Moreover, they are going to increase!

All "gestures" with government spending and taxes "scientifically" are called fiscal policy.

From the point of view of macroeconomic regulation fiscal policy represents the government's measures to change government spending and taxes, aimed at ensuring production at the level of potential GDP and overcoming inflation.

Note. Pay attention - "at the level" and "overcoming". It will be seen further how this is almost impossible to achieve. But theoretically it is possible ...

A sound fiscal policy aims to overcome cyclical downturns in the economy when actual GDP is below potential. It involves stimulating aggregate demand by increasing government spending or tax cuts, or a combination of these measures.

Suppose the government decides to increase its spending.
Using the aggregate demand-aggregate supply model, we see that this measure leads to an increase in aggregate demand.
In this case, the AD curve is shifted to the right from position AD0 to position AD1.

We assume that the short-term aggregate supply curve is horizontal (this is easier, but it can be replaced by a sloping one, but what does it change? ...), proceeding from the fact that prices in a short period are assumed to be given:

As a result, the equilibrium GDP can grow from Y0 to Y, that is, reach its potential level.

Attention! Growth in aggregate demand is influenced not only by the initial increase in government spending, but also by the multiplier effect of autonomous spending.

Let me remind you that the effect is that an increase in government spending causes an increase in producers' incomes. Producers spend part of the income they receive, further increasing aggregate demand, which means the income of other producers. In the economy, a chain reaction of an increase in aggregate demand arises: an increase in government spending - an increase in income - an increase in producer spending - a new increase in income - again an increase in spending, and so on.

Ultimately, the growth in aggregate demand and national income (ΔY) is:

Where m is the multiplier of autonomous expenses,
ΔG is the initial increase in government spending,

MPC is the marginal propensity to consume.

That is, if the marginal propensity to consume is 0.8, then the autonomous spending multiplier is 5. This means that each ruble of an increase in government spending causes an increase in aggregate demand by 5 rubles.

But, although in a short period, an increase in government spending can improve the state of the economy, this phenomenon causes a budget deficit. And if the budget deficit is significant (more than 3% of GDP), then in the long term, such a deficit undermines the economy (although it weakly undermines the US economy - remember this "strange" economic phenomenon).

The state of the state budget has a significant impact on all macroeconomic indicators, and therefore is an object of close public attention.

For example, according to the financial stability pact concluded by the countries of the European Monetary Union, the size of the budget deficit cannot exceed 3% of the country's GDP. Large deficits either lead to inflation or reduce private investment.

Why is cutting? Because the growth in government spending is covered by loans in financial markets. And this entails an increase in interest rates in the economy.

And private investment negatively depends on the interest rate (the higher the rate, the less investment), they decrease. By the way, the rise in inflation also leads to an increase in rates, since credit institutions "put" inflation in the nominal rate.

So, the considered harmful consequences of an increase in public spending are called the crowding out effect.

ON CORRUPTION AND GDP.

Stimulating the economy through government spending in Russia may not fit standard economic formulas. Due to high corruption, budget money often simply does not reach the addressees. As a result, the budget bears increased liabilities, and this does not or does not affect the aggregate demand.

TAXES

The state can stimulate aggregate demand not only by increasing its spending, but also by cutting taxes. In this case, households and firms receive additional funds that they can use to increase their spending. As a result, the aggregate demand curve shifts to the right, which causes GDP growth

This also has a multiplier effect.

Suppose the government cuts taxes by 100,000 rubles and the marginal propensity to consume is 0.8. Therefore, having saved 100,000 rubles. on taxes, households increase their expenses by 80,000 rubles, and the remaining 20,000 rubles. they save. These 80,000 rubles. turn into producers' income. Of the money received, manufacturers spend 64,000 rubles. (80%), saving 16,000 rubles. (20%) and so on.
Thus, we observe a "chain" reaction of an increase in aggregate demand: tax cuts - spending growth - income growth - spending growth: 80 000 + 64 000 + 51 2000 + 40 960 +… + 0 = 400 000.

In general, the growth in aggregate demand (ΔY) can be calculated using the formula:

Where ΔT is the change in taxes.

The minus sign in parentheses indicates that when taxes are reduced, when (ΔT) is negative, aggregate demand increases, and when taxes increase, it decreases.

The fraction MRS / (1-MRS) is the tax multiplier (mt). This is a coefficient showing how many rubles changes in aggregate demand when taxes change by 1 ruble:

mt = -ΔY / ΔT = MPC / (1-MPC)

In the example, a tax reduction of 100,000 rubles. led to an increase in aggregate demand by 400,000 rubles. - the tax multiplier is 4.

Restraining fiscal policy

It is used in the case when the actual GDP exceeds the potential (the economy is working with overload).
Resources are becoming scarce, which is fraught with an increase in their prices, respectively - and an increase in prices for finished products, that is, inflation.
To combat inflation, the government restrains aggregate demand. This is accomplished by cutting government spending or increasing taxes, or a combination of both.

As a result, the aggregate demand curve shifts to the left from AD0 to AD1, which leads to a reduction in GDP to its potential level (from Y to Y0) at the same price level (P):

In this case, the multiplier effects operate in the opposite direction: cuts in government spending or increases in taxes trigger a chain reaction of reduced spending by households and firms.

Part 8. Explain how this will affect the economy ...

In Part 7, we looked at one of the categories of autonomous expenditures that are managed through fiscal policy.
Now we will consider the tasks on this topic in order to "consolidate" the material in practice and acquire some ease in predicting what follows what in macroeconomics.

Problem 1. Let the equilibrium GDP in the economy be lower than the potential one.

The state increases its spending or cuts taxes.
Let us explain with the help of the graph how this will affect the economy.
We will also show what the continuation of such a policy will lead to when the economy reaches a state of full employment.

Solution.
An increase in government spending or tax cuts increases aggregate demand - shifts the AD curve to the right (from position AD0 to position AD1):

This leads to the fact that the equilibrium GDP increases and reaches the potential level (full employment).

If the state continues, the AD curve will shift to the AD2 position. In the short run, prices will rise to P2, but producers will respond to increased demand by increasing output (from Y1 to Y2). The point of short-term equilibrium will be point E2.

Such an equilibrium will not be long-term, since the equilibrium GDP exceeds the potential one and the economy is overloaded.

This means that resources become scarce, their prices rise, producers' costs increase for the same output, and the short-term aggregate supply curve gradually begins to shift upward from SRAS0 to SRAS1. Ultimately, the economy comes to the equilibrium point E3, which means a return to potential GDP at a higher price level (P3).

Task 2.1.
Aggregate demand function:
Y = 240-10 P.
Short-term aggregate supply function: P = 20.
Potential GDP is 50.
Let's calculate the equilibrium levels of prices and GDP.
And let us ask ourselves a question: will the economy be in a state of long-term equilibrium?

Solution.
Equilibrium GDP is calculated as a solution to the equation - it is enough to substitute P = 20 into the equation and it turns out that the equilibrium GDP is 40. And since the potential GDP more, then the economy is not in a state of long-term equilibrium and something needs to be done.

Task 2.2.
What will be the equilibrium levels of prices and GDP (see Problem 2.1) if the government increases its spending by 2 and the marginal propensity to consume is 0.75?
What should be the increase in government spending in order for GDP to reach its potential level?

Solution.
If the government increases its spending by 2, the growth in aggregate demand and GDP, taking into account the multiplier of autonomous spending, will be:

Under this condition, the equilibrium GDP reaches 48, but still remains below the potential level.

For GDP to reach its potential level, i.e. increased by 10, an increase in government spending by 2.5 is needed, since the multiplier of autonomous expenditures is 4.

Let's illustrate the solution graphically.

Objective 3.
Let's say the marginal propensity to consume is 0.8.
The question is, by how many rubles will aggregate demand change if the state increases its spending by 1000 rubles?
How will aggregate demand change if the government, instead of changing spending, increases (cuts) taxes by the same amount?

Solution.
With an increase in government spending due to the effect of the multiplier of autonomous expenditures, the increase in aggregate demand and national income (ΔY) is:

With a reduction in taxes due to the action of the tax multiplier, the increase in aggregate demand and national income (ΔY) is:
If taxes are not reduced, but are increased by 1,000 rubles, then due to the effect of the tax multiplier, aggregate demand and national income will decrease by 4,000 rubles.

Problem 4
Initially, the economy was characterized by the following data:
- the economy functions under conditions of underutilization of available resources, the short-term aggregate supply curve is horizontal;
- the marginal propensity to consume is 0.8;
- investment function: I = 200 - 2500 r, where r is the real interest rate equal to 4%;
- the equilibrium GDP is 10,000.
Trying to stimulate the economy, the state increases its spending by 100.
The increase in costs is covered by loans. As a result, the interest rate rises to 5%.

Questions:
How will aggregate demand and GDP change if prices remain stable?
Is there a crowding-out effect on private investment?
How do the results compare to the multiplier effect?

Solution.
If changes in the economy were limited only to an increase in government spending, then, taking into account the multiplier, aggregate demand and GDP would grow by 500:

The problem, however, is that an increase in government spending increases the interest rate, which in turn reduces private investment. A reduction in investment with an increase in government spending constitutes a crowding-out effect.

We find what the investments were equal to at the old interest rate:

I = 200 - 2500 * r = 200 - 2500 * 0.04 = 100.

At the new interest rate, investments fell to 75:

I = 200 - 2500 * r = 200 - 2500 * 0.05 = 75.

Thus, investments decreased by 25 or their growth is equal to -25.

It should not be forgotten that, while declining, investments also multiply, as with an increase. In other words, a reduction in investment entails a much larger drop in aggregate demand and GDP:

Total: due to the growth of government spending, GDP grows by 500, and due to a decrease in investment, it falls by 125. In general, therefore, GDP grows by 375:

Y = 500 - 125 = 375

Graphically, the solution looks like this:

Part 9. Objectives and instruments of monetary policy

The objectives and instruments of the monetary policy of the Bank of Russia can be summarized in a "table".

The "cheap money" policy
Goals:
Increasing the money supply to stimulate economic growth and reduce unemployment
Instruments:
- Purchase foreign currency
- Purchase of government securities
- Reducing the required reserve rate
- Reducing the interest rate on deposits of commercial banks with the Central Bank
- Reducing the refinancing rate
- Repurchase by the Central Bank of its bonds from commercial banks
- Decrease in balances on government accounts with the Central Bank

Expensive money policy
Goals:
Reducing the money supply to fight inflation
Instruments:
- Sale of foreign currency
- Sale of government securities
- Increase in the required reserve rate
- Increase in the interest rate on deposits of commercial banks with the Central Bank
- Increase in the refinancing rate
- Sale by the Central Bank of its bonds to commercial banks
- Increase in balances on government accounts with the Central Bank

In Western countries, the main instruments of monetary policy of Central banks are operations on open market on the purchase and sale of government securities and changes in the discount rate.

In recent years, the following instruments have been mainly used in Russia:
- Central Bank interventions on foreign exchange market, that is, the purchase and sale of foreign currency,
- change in balances on government accounts with the Central Bank,
- change in interest rates on deposits of commercial banks with the Central Bank,
- issuance of lombard loans and repo transactions.

But what is remarkable, and the refinancing rate in the era of the 2009 crisis began to influence the same ...

Will a stimulating monetary policy be effective?

Suppose an increase in investment and consumer spending increases aggregate demand. In this case, the aggregate demand curve will rise to the right.

But ... whether production will grow as a result is a big question!
Indeed...
let us have such a picture:

So, it is shown that the economy operates on a short-term segment of the aggregate supply curve. Resources are underutilized and the aggregate supply line (SRAS) is horizontal. As a result, GDP grows by the same amount as aggregate demand (from Y0 to Y1) at the same price level (P0 = P1).

What if we have a picture like this:

The economy operates under conditions of full use of resources. And in this case, we have a rise in prices! That is to say, "absolute" inflation.

In the dynamics of Fig. 2. should be portrayed more difficult. Namely, dealing with prices will not be so simple, namely, as shown in Fig. 3.

In a short period, the balance will move to point E2. This would mean real GDP growth coupled with rising prices.

Since at point E2 the equilibrium GDP exceeds the potential one, resources become scarce, their prices rise, and producers' costs increase with the same volume of output. As a result, the short-term aggregate supply curve is gradually beginning to shift upward from SRAS0 to SRAS1. Ultimately, the economy comes to the equilibrium point E3, which means a return to potential GDP at an even higher price level (P3).

I will not give the slanting line of the sentence. That is, not all resources are fully used, but there is a potential GDP somewhere nearby. In this case, we get a MIXED phenomenon: supply will grow and prices will rise!

Finally, one of the good macroeconomic statements:
the flatter the slope of the aggregate demand function, the more effective the stimulating monetary policy.

Therefore, when we begin to argue about what the monetary pumping of the economy will lead to, we must try to imagine and assess the degree of utilization of production capacities. It turns out that if the capacities are not loaded, then why not!
And if the capacities are one hundred percent loaded, then monetary pumping is useless. It will only lead to inflation.

And now let us designate which events the situation just analyzed can relate to.

Let the Bank of Russia buy up currency. What will happen?

Buying up foreign currency, the Bank of Russia issues rubles, i.e. increases the money supply in Russian economy... This leads to an increase in aggregate demand, and the AD curve shifts to the right.
The result will depend on the state of the economy. If equilibrium GDP is noticeably below potential, and the short-term aggregate supply curve is close to horizontal, an increase in demand will lead to an increase in GDP and employment with little or no inflation. This situation is depicted in Fig. 1.
If the equilibrium GDP is close to potential or equal to it, then such a stimulating monetary policy will ultimately lead to the fact that GDP will return to its potential level at higher prices. This situation is depicted in Fig. 2.

What happens if the Bank of Russia sells government bonds to banks?

By selling government bonds to commercial banks, the Bank of Russia pulls rubles out of the economy - it reduces the money supply. This leads to a decrease in aggregate demand, and the AD curve shifts to the left.
Such a restraining monetary policy is justified in the case when the equilibrium GDP has reached its potential level, and the aggregate demand continues to grow. The economy is threatened by inflation (Fig. 2).
The limitation of aggregate demand by the Central Bank is holding back the rise in prices.

The Bank of Russia reduces the mandatory reserve ratio of commercial banks. What will happen?

If the Bank of Russia reduces the mandatory reserve ratio of commercial banks, then they will have excess reserves that can be used to issue loans. This leads to an increase in the money supply in the economy through the multiplier effect. The justification for such a policy depends on the state of the economy, the degree of utilization of production capacities.

What happens if the Ministry of Finance increases its account balances with the Bank of Russia?

If the Ministry of Finance increases the balances on its accounts with the Bank of Russia, it withdraws money from the economy - the money supply decreases. it anti-inflationary policy... It is used to sterilize excess money supply. Thus, the collected taxes are not returned to the economy, but remain sterile in the Central Bank.

The Bank of Russia conducts reverse repo transactions. What will happen?

Repo transactions are the essence of a buyback transaction. In reverse repo transactions, the Bank of Russia temporarily sells government securities to commercial banks, redeeming them after a specified period. Carrying out such operations reduces the funds of banks in accounts with the Central Bank, which means a reduction in the monetary base, respectively, and the money supply in the economy. It is used as a means of anti-inflationary policy.

What happens if the Bank of Russia conducts direct repo transactions?

Direct repo transactions mean the temporary sale by commercial banks of government securities to the Bank of Russia with the obligation to repurchase them after a certain period of time. At the same time, banks temporarily increase their funds on accounts with the Central Bank, i.e. the monetary base is growing. This leads to an increase in the money supply in the economy, since commercial banks can provide more loans to the real sector. Such transactions are intended to stimulate economic growth and employment, but can be fraught with inflation.

The Bank of Russia is buying up foreign currency, while increasing interest rates on deposits of commercial banks at home. What will happen?

These instruments of monetary policy affect the change in the money supply in different ways. When the Bank of Russia buys up foreign currency, the money supply increases. At the same time, by increasing interest rates on deposits of commercial banks at home, the Central Bank withdraws excess money from circulation.

What happens if the RF Pension Fund invests in the purchase of government bonds from the Bank of Russia?

When a Russian pension fund invests in buying government bonds from the Bank of Russia, it has less money left in its bank account and the money supply decreases. "Objectively" it contributes to the fight against inflation.

PROBLEM 1
The velocity of money circulation is determined from the equation: MV = PY. When conducting monetary policy, the Central Bank proceeds from the constancy of V. Then, it estimates the possible inflation rate in a given year. Finally, the Central Bank aims to ensure a certain rate of growth in real GDP, for which it changes the money supply in the economy.
In this regard, let us assume that inflation is 5%, and the Central Bank's goal is to grow real GDP by 2%. By what percentage should the money supply change?

Solution.
Let's rewrite the equation of the quantitative theory of money:

For real GDP and prices to rise, as indicated in the condition of the problem, the new money supply (M1) must be:

M1 = (1.05P) * (1.02Y) / V = 1.071 PY / V = 1.071 * M.

The money supply should grow by 7.1%!

"Quickly" you can get the same result, but approximately, as follows:
Let's rewrite the equation of the quantitative theory of money in percentage form. That is, we will replace the absolute values of the variables M, V, P, Y with their changes (in%) - m, v, p, y, respectively:

Since the velocity of money circulation has not changed, then:

M = 5% + 2% = 7%

Please note that the result is somewhat inaccurate!

PROBLEM 2
The central bank increased the money supply in the economy by 40 den. units How will this affect the value of real GDP if:
a. each increase in the money supply by 20 den. units reduces the interest rate by 1 percentage point;
b. every 1 percentage point of interest rate cut stimulates new investment spending in the amount of 30 den. units;
c. the multiplier of autonomous expenses is 2.5;
d. the unemployment rate is so high that an increase in aggregate demand does not lead to a noticeable increase in prices.

Solution.
Since each increase in the money supply by 20 den. units reduces the interest rate by 1 percentage point, money supply growth by 40 den. units leads to a fall in interest rates by 2 percentage points.
Since each percentage point of interest rate cut stimulates new investment spending in the amount of 30 den. units, a decrease in the interest rate by 2 percentage points leads to an increase in investment by 60 den. units
Since investment in in this case- autonomous expenditures, and the autonomous expenditures multiplier is 2.5, the increase in aggregate demand and real GDP will be 2.5 * 60 = 150.
Condition d) suggests that the short-term aggregate supply curve in this case is close to horizontal. Consequently, an increase in aggregate demand leads to the same increase in GDP:

Part 10. Inflation

As for inflation, there are three main reasons for it, respectively - three types of inflation:
- inflation caused by growth in demand,
- inflation caused by rising costs,
- inflation caused by inflationary expectations.

1. Inflation caused by increased demand.
Prices rise because aggregate demand increases - the AD demand curve shifts to the right.

2. Inflation caused by rising costs.
Prices rise because producers' costs increase - the short-term supply curve AS shifts upward.

3. Inflation caused by inflationary expectations.
"Those who are confident in their own safety are absolutely defenseless - this is a well-known axiom!"

Prices are rising because both producers and consumers expect them to rise. The point here is that with the rise in prices last year, firms and their employees form stable expectations of a rise in prices this year as well. Therefore, firms raise their prices in advance so as not to lose in the inflationary race. Workers, for their part, demand higher wages in advance so that their real incomes do not fall due to higher prices. As a result, inflationary expectations are becoming a reality: prices are indeed going up.

The American economist R. Solow wrote about this:

"Maybe inflation is ineradicable due to the fact that we expect it, and we expect it because it was."

Inflationary expectations only reinforce objectively occurring processes: inflation caused by an increase in demand or inflation caused by an increase in costs.

The same causes of inflation can be seen using the equation of the quantitative theory of money:

MV = PY. Hence: P = MV / Y.

Task.
What impact will consumer fear of a future crisis have on the aggregate demand and aggregate supply curves if all other factors remain unchanged?

Answer.
In fear of a future crisis (which will lead to higher unemployment and lower incomes), consumers usually cut their spending in advance, increasing their savings.
This leads to a decrease in aggregate demand, which means a shift of the AD curve to the left:

In this case, the short-term aggregate supply curve can be assumed to be horizontal, since prices in modern economy especially resistant to decline.

As a result, we are seeing a drop in real GDP at the same price level.

Note that this model illustrates the importance of the psychological factor (expectations) in economics: if everyone expects something, it usually happens.

LECTURE 4

Macroeconomic instability: unemployment and inflation.

One of the most important regularities in the functioning of a capitalist market economy is macroeconomic instability, which manifests itself in periodic fluctuations in the total volume of production, employment (unemployment) and price levels. Unemployment and inflation, being one of the most important macroeconomic problems, are the clearest manifestations of macroeconomic instability. At the same time, both unemployment and inflation have a strong impact on the socio-economic development of society as a whole, being the object of not only close attention of economists, but also of state macroeconomic policy.

1. Economic cycles. Potential and actual GDP. Reasons for economic fluctuations. Cycle phases.

2. Theories of cyclical development.

3. Unemployment and its forms. Measuring unemployment.

4. Natural rate of unemployment. Okun's Law.

5. Inflation and its measurement. Inflation rate.

6. Demand inflation and cost inflation.

7. Inflation and real income. Influence of inflation on the redistribution of income and wealth. Influence of inflation on the volume of national production.

8. Stabilization policy and its methods.

1. Economic cycles. Potential and actual GDP. Reasons for economic fluctuations.

Economic cycles. Potential and actual GDP.

Economic cycle represents periodically repeating and successive ups and downs of economic activity against the background of the general trend of economic growth.

Figure 4.1 shows a possible cycle pattern. Plot years on the abscissa. The ordinate is the volume Gdp as the most common indicator of economic activity. The straight line represents the trend of economic growth (trend), that is, it represents the dynamics of volume potential Gdp in time. The wavy line depicts the actual cyclical development of the economy, that is, it represents the dynamics of volume over time actual Gdp (in nominal terms).

Actual GDP- the volume of real output created in the economy for a certain period.

Level actual GDP is determined by the interaction of aggregate demand and potential GDP ... If the level of aggregate demand is less than potential Gdp, then the level of the actual Gdp will be below potential Gdp, since it will be equal to the level of aggregate demand. With an increase in aggregate demand, the actual Gdp can reach the level of potential Gdp, but by definition cannot be higher than it (Figure 4.1A).

GDP actual potential GDP

GDP (nominal)

Gdp

potential GDP

actual GDP

Figure 4.1 shows the actual Gdp presented in nominal terms: deviations of the wavy line up from the trend mean inflation.

Reasons for economic fluctuations.

For the first time, the economic cycle manifested itself in England, where in 1825 the first crisis of overproduction was noted (as the economic recession or recession). Since then, this phenomenon has been repeated periodically every 7-12 years. Since 1857, the cycle began to take on a global character, since this year the economic recession (recession) hit all the most developed countries. The deepest recession in the capitalist countries took place in the years and went down in history under the name « The Great Depression» : the drop in production reached 40% in some countries.

Phases of the economic (business) cycle

Rice. 4.2

Gdp

potential GDP

c) boom actual GDP

d) recession

b) rise

a) depression (the lowest point of the cycle)

The economic cycle is divided into four phases (Figure 4.2):

a) depression - a period of rapid decline in aggregate demand combined with a rapid decline Gdp and an increase in unemployment, which, in the end, ends with the achievement lowest point cycle (reaching the lowest point of the cycle is possible without depression).

b) rise - increase in aggregate demand combined with growth Gdp and reducing unemployment;

v) boom - the period when the aggregate demand reaches, and then, as it approaches peak cycle, exceeds the level of potential Gdp... Full employment is achieved, excess demand leads to growth general level prices (inflation).

G) recession - the phase following the boom. Aggregate demand declines, causing moderate contraction at first Gdp and unemployment, and then, as aggregate demand further declines, a depression sets in. (The difference recession from depression is that on recession the price level remains unchanged if recession grows into depression, the price level falls).

2. Theories of cyclical development.

Later, cycles of a different duration were discovered, associated with the periodic renewal of the constituent parts of fixed capital and inventory.

Cycles of short duration (3-4 years) are called Kitchin cycles and are associated with fluctuations in inventory.

N. Kondratyev discovered “big cycles of economic conditions” (1928) - cycles lasting 40-50 years associated with structural changes in the economy.

In the 40s of the twentieth century, the Austrian economist J. Schumpeter created a general picture of cycles of varying duration. They seem to be strung one on top of the other and then weaken, then reinforce each other (Figure 4.3).

Inflation is measured using an indicator called the rate (rate) of inflation. Inflation rate shows the growth (increase) of the price level and is calculated using price indices.

Inflation rate in the current year:

π = (R -P-1 ) : P-1 ,

where P, P-1- price indices, respectively, in the current and last years.

One of the serious problems of inflation is the uneven growth of prices for various goods. While prices for some goods can rise significantly, for others they grow more slowly and with a delay. As a rule, wage rates begin to rise with the greatest delay.

If the inflation rate is known, then using "Rule of magnitude 70" you can quickly calculate the number of years during which the price level doubles. This requires the number "70"

divided by (annual average) inflation rate : 70

6. Demand inflation and cost inflation.

Demand inflation.

From the last lecture, it is known that there are two types of inflation, generated by different reasons: demand inflation and cost inflation .

Demand inflation arises as a result of an increase in aggregate demand upon reaching potential level real GDP... Figure 4.4 shows the relationship between aggregate demand growth and demand inflation.

If aggregate demand grows by Keynesian(horizontal) segment of the aggregate supply curve, that is, the curve AD1 moves to position AD2 , the price level will not change and will remain the same Р1... This will increase the level of real Gdp therefore, the unemployment rate will decrease.

If the growth in aggregate demand continues so that the curve AD2 will move to position AD3 , that is, the equilibrium goes to the border upward and classic segments, the price level will rise to P3... Real Gdp will increase, reaching the potential level Qf. Unemployment will reach natural levels. An increase in the price level in an upward segment until reaching the potential Gdp (Qf) is called premature inflation.

As soon as the aggregate demand exceeds AD3 , he will become excess aggregate demand , then it will start true demand inflation.

Rice. 4.4

Inflation gap

P4 AD3 True inflation

Premature inflation

P1 Recession gap

Consider how the values of nominal and real Gdp.

· On horizontal segment: the price level is unchanged (P = const), therefore, nominal and real GDP grow at the same rate, since there is no inflation and changes in the nominal Gdp reflect only changes in the real Gdp.

· On intermediate segment nominal GDP growing faster real GDP , since the growth of the nominal Gdp reflects the growth of real GDP, and rising price levels (inflation)

· On upright segment takes place true (pure) demand inflation, since the growth of the nominal Gdp reflects only an increase in the price level, and the real Gdp remains unchanged.

Thus , source and cause true demand inflation is anexcess aggregate demand .

Cost inflation.

Cost inflationarises as a result of rising resource prices... Faced with rising costs (driven by rising resource prices), manufacturers charge higher prices for their products in an attempt to maintain profits by offsetting the increased costs by inflating prices.

Rice. 4.5

P AS1 AS

P

In Figure 4.5, we see how rising costs are shifting the aggregate supply curve. AS left to position AS1 ... The price level rises from R before Р1, real Gdp shrinks from Q before Q1 , therefore, employment is reduced - begins stagflation , that is situation in which low level real GDP is combined with rising prices (inflation).

Main sources of cost inflation:

1.increase in nominal wages (usually due to a change minimum rate wages in legislation), not supported by a corresponding increase in labor productivity.

2. an increase in prices for energy carriers and raw materials (either due to a decrease in the supply of these resources in the market, or as a result of cartels, or due to a fall in the country's exchange rate, which leads to an increase in the cost of imported resources).

In reality, it can be difficult to distinguish between the two types of inflation. However, it is generally accepted that demand inflation continues as long as there is excess aggregate demand... Cost inflation automatically limits itself, reducing the demand for resources, and gradually disappears (however, there remains the problem of increasing the real volume of production and employment).

7. Inflation and real income. Influence of inflation on the redistribution of income and wealth. Influence of inflation on the volume of national production.

Inflation and real income. Influence of inflation on the redistribution of income and wealth.

One of the most serious consequences of inflation is income redistribution. As already noted, inflation reduces the purchasing power of money, which is why many believe that the whole of society suffers from inflation. To find out whether this is really so, it is necessary to analyze how they are related to each other: inflation, nominal income and real income.

Nominal income Is the amount of money that households receive for factors of production. Real income is the nominal income divided by the price level.

If known inflation rate, and also change nominal income in percents(= growth rate of nominal income), then

Δ Yreal (in%) = ΔYnom... (v %) - p,

where Y is income.

In the face of inflation real income:

· will decrease in case if nominal income grows at a rate that is lower than the rate of inflation ;

· Will not change , if nominal income is growing at the same rate as inflation;

· will increase , if nominal income grows faster than inflation.

Thus, not everyone suffers from inflation.

Suffer recipients of fixed nominal income(government employees, retirees, benefit recipients), and savings and creditors.

Win entrepreneurs whose prices for finished products are growing faster than prices for resources, debtors, as well as the state, which pays off its obligations with "cheap" money.

In other words, inflation “taxes” those who receive fixed incomes and “subsidizes” those whose money incomes grow faster than inflation.

As a result, there is a redistribution of income and wealth..

Influence of inflation on the volume of national production.

The impact of inflation on the volume of national production (real Gdp) and employment.

Some demand inflation is accompanied by growth real Gdp and a reduction in unemployment ( premature inflation on the upward segment of the aggregate supply curve).

With true demand inflation real GDP does not change , remains at the potential level, in the economy - full employment.

If inflation is due to rising costs, then real GDP declining, unemployment rising.

Hyperinflation (that is, extremely high and growing inflation rates), has a devastating effect on the volume of national production and employment. It is usually preceded by an inflationary spiral (wage-price spiral): for example, an initial increase in the prices of goods and services due to higher prices for raw materials may lead to demands from unions for higher money wages. If these requirements are met, increased wage costs will push producers to raise prices for final goods and services, etc.

Hyperinflation leads to a situation in which people lose confidence in money and turn to barter. In this case, there is a great danger of economic collapse and serious social upheaval.

Hyperinflation is rare... Its causes lie both in politics and in the economy, for example, with the excessive release of money to cover government spending during the war or an acute shortage of goods and services combined with suppressed demand, as is usually the case in the early post-war years.

8. Stabilization policy and its methods

Stabilization policy is the management of the level of aggregate demand in the economy using fiscal and monetary politicians in order to mitigate or even eliminate fluctuations in the level of economic activity (real GDP and employment) associated with the economic (business) cycle.

Gdp

Cycle Softening Actual GDP

Potential GDP

The main goal of the stabilization policy is "Accurate at a construction site" aggregate demand in order to prevent:

1. inadequacies aggregate demand compared with potential Gdp(to avoid loss of output and unemployment);

2. redundancy in aggregate demand compared with potential GDP(to prevent inflation);

Of course, the ideal would be a policy that would ensure such an increase in aggregate demand, which would exactly match the growth of potential Gdp(solid straight line in Figure 4.6). However, the development and implementation of stabilization policies are faced with a number of problems related to the accuracy of the forecast. economic development, precise definition of the time and volume of activities to be carried out. The actual results of this policy are more modest: at best, the government has been able to soften recessions and booms (dashed line in Figure 4.6).

The instruments of fiscal and monetary policy which will be analyzed in lectures 6 and 7.

The stabilization policy is one of the aspects of the state's macroeconomic policy. Other important areas are supply policies affecting the growth rate of potential GDP ( Lecture 10 ) , and the policy of exchange rates affecting the competitiveness of goods and services supplied to the external market (lecture 11).

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