Lecture 2. Fundamental Problems of the National Economy
Recommended post
- Macroeconomics table of contents (link in original Korean note)
1. Long-run economic growth
1) Economic growth: a sustained increase in real GDP per capita.
2) This topic studies:
- the determinants of economic growth, and
- why growth rates differ across countries.
3) Data 1. A sustained rise in the income level
4) Data 2. An increase in the financial interrelation ratio
- (1) Financial interrelation ratio = Financial assets / GDP
- (2) Meaning 1: a wider range of choices in financial services
- (3) Meaning 2 (borrowers / fund demanders): less likely to face credit constraints
- (4) Meaning 3 (lenders / fund suppliers): more opportunities for asset accumulation
2. Short-run business cycle fluctuations
(1) Overview
- (1) In the short run, the economy repeatedly rises and falls.
- (2) This topic studies what causes business cycles, and whether it is desirable for the government to intervene to reduce the amplitude of fluctuations.
(2) The four phases of a business cycle
- (1) Boom (expansion): overall economic activity rises
- (2) Downturn: economic activity begins to lose momentum
- (3) Recession (slump): consumption and investment decline further, and employment and income fall
- (4) Recovery: production becomes active again and employment increases
- (5) Upper turning point (peak): boom → downturn
- (6) Lower turning point (trough): recession → recovery
(3) Business-cycle periodicities
- (1) Kitchin cycle: about 40 months; driven by inventory fluctuations
- (2) Juglar cycle: about 9.5 years; driven by incremental technological innovation
- (3) Kondratiev wave: about 50 years; associated with major inventions in capitalist economies (e.g., railways, electricity)
(4) Trends in macroeconomic indicators
Figure 1. Trends in Korea’s macroeconomic indicators (figure referenced in the original note)
- (1) Persistence
- Business-cycle movements at a given point tend to carry over from the previous state.
- Current real GDP is influenced by past real GDP.
-
(2) Irregularity: the amplitude and frequency of business cycles are irregular.
- (3) Comovement: many macro variables fluctuate with strong regularity alongside real GDP.
- Procyclical: positive correlation with real GDP fluctuations
- Countercyclical: negative correlation with real GDP fluctuations
- Acyclical: neither procyclical nor countercyclical
- (Note in original: memorize three countercyclical indicators.)
- (4) Volatility: the degree of deviation from the long-run trend; measured by standard deviation.
- Leading: moves before real GDP
- Lagging: moves after real GDP
- Coincident: moves at the same time as real GDP
-
(5) Cyclical behavior of major (macro/financial) indicators
- Consumption
- Among the four expenditure components of national income, consumption accounts for the largest share: 60–70% of aggregate demand.
- After the Asian Financial Crisis, consumption became more volatile due to “trauma-like” consumption patterns.
- This is referred to as the consumption volatility puzzle.
- Investment
- Investment is the most volatile because it is influenced by psychological factors such as “animal spirits” and uncertainty.
- Housing investment and inventory investment tend to be leading indicators.
- Government spending
- Government spending is planned and therefore among the least volatile indicators.
- Because it is used to dampen fluctuations, it is described as countercyclical.
- Real interest rate
- A higher real interest rate restrains the economy by discouraging firms’ investment.
- A higher real interest rate increases household debt, reducing firms’ investment.
- Prices (inflation rate)
- If booms/recessions are driven by demand-side shocks (consumption, investment, etc.): inflation is procyclical.
- If booms/recessions are driven by supply-side shocks (e.g., international oil price changes): inflation is countercyclical.
- Supply-side factor 1: stagflation due to the 1974 and 1979 oil shocks
- Supply-side factor 2: the IMF/foreign exchange crisis, where a sharp rise in the exchange rate greatly increased the cost of imported oil
- Long-term interest rate & stock index: procyclical and leading
- Bank loan-to-deposit ratio (LDR): procyclical and coincident
- Credit spread: countercyclical and coincident
- Consumption
3. Unemployment
- (1) Efficiency aspect: loss of usable social resources (lost output)
- (2) Equity aspect: those with relatively fewer capabilities are more likely to become unemployed, worsening income distribution (the rich get richer, the poor get poorer)
4. Inflation
- (1) Transfers wealth and income from holders of monetary assets to holders of real assets
- (2) Ultimately transfers wealth from the private sector to the government: inflation can function like a tax on money holdings
- (3) If inflation is anticipated, economic agents may prepare in advance, so the harm may be smaller
5. Balance of payments and the exchange rate
- (1) Balance of payments: divided into the current account and the capital account (as written in the original note)
- (2) Current account: when net exports rise, the current account becomes a surplus; when net exports fall, it becomes a deficit
- (3) Capital account: when foreign exchange reserves rise, the capital account is treated as a surplus; when reserves fall, it is treated as a deficit
- When reserves decline due to a capital-account deficit, speculative attacks may occur in anticipation of the limits.
- Example: the IMF financial crisis
- (4) The current account and capital account generally have an inverse relationship
- When the exchange rate rises, net exports rise, improving the current account.
- The current-account surplus is invested abroad, implying payments to foreigners and a capital-account deficit.
Original entry timestamp in the Korean file: 2020-09-12 09:44