This is the first of the three courses part of the Globalization, Economic Growth and Stability Specialization. This course will employ a non-technical approach to analyze how governments use policy to influence a country's economy. Upon completing the course you should be able to discuss national debts and deficits, examine fiscal and monetary policy and their appropriateness to the situation of an economy, and anticipate the results of fiscal and monetary policies and structural reform on a country. These concepts will give you the tools to develop your own position in many current economic debates, such as fiscal stimulus vs. austerity, the merits of quantitative easing, the need for higher interest rates or the future growth path of many modern economies.
GDP Gaps and Policymaking
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Из курса от партнера IE Business School
Understanding economic policymaking
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IE Business School
664 оценки
Курс 1 из 3 — Specialization Globalization, Economic Growth and Stability
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Macroeconomy Overview
We are surrounded by news and commentary on the macroeconomy. To understand it, we need to grasp the meaning of GDP, inflation and unemployment and see what their “normal” levels are and how they relate to one another. Though these levels and relationships are far from mechanical, they provide an essential foundation to understanding what governments are doing in a macroeconomy.
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Gayle AllardProfessor
Economics
[MUSIC]
So, once we know what potential GDP is for the economy, we
can move to a really important concept, which is the output gap, or
I'm going to give a different name to it in a later session
where we actually draw it and, and identify what policy makers should do.
The output gap is the difference between how much we're growing and how
much we should grow if we wanted to be at that ideal place.
Okay, now obviously the output gap could be
positive, in other words, we are growing too fast.
All right.
We are overheating, all right.
And so, we could have a positive output gap.
Some number greater than one, hard to remember
what that felt like, but it does happen.
Or, we could have a negative output gap,
where we're growing slower than we would like
to be, than we actually should be, if
we wanted inflation and unemployment to be reasonable, okay?
If we're growing too slowly, we'll say we have a negative output gap,
and on the chart this will show up as some negative number, okay?
If we growing right where we should be, there's no output gap and so on
the chart I'm going to show you right now; that will show up as zero, okay?
So what we're going to be analyzing in this, in this next
webshot from, from the OECD is the difference between how much the
economy's GDP is actually growing and how it much it should
grow, if we were at that ideal place, which is potential GDP.
So, let's just look at this OECD screen.
You can see that, this is the United States over quite a long period.
Again, I started in 1990.
And you can see, if you think of positive numbers as growing too fast.
Positive output gap.
And negative numbers is growing too slow, negative output gap.
You can see that the US economy actually was growing too slowly
for a very long period, from the early 90s to the late 90s.
Okay?
You see this negative output gap here, and then you can see that it
moves into positive numbers about the, end of the 90s.
And going all the way until this financial crisis.
So, look at that long period of a positive output
gap, the economy going faster than it actually should have.
Now, later on, we'll think about this, and
we'll, we'll realize that that was a problem.
Okay?
And then you can see the financial crisis hits, begins in 2008.
And you can see that we drop from
a positive output gap, to a negative output gap.
So, we're growing too slowly.
We're growing less than potential.
And this continues up until the present time and
even according to the OECD, it will continue through 2014.
Okay, so looking at it this way, we can,
we're not actually looking at GDP growth rates, we're
looking at GDP growth minus our target, and we
can kind of make sense out of the figures.
Now, we can make the same analysis of any group of countries, right?
It's usually easiest with the developed countries because the OECD gives us
a very, the OECD gives us a very precise estimate every year, of
how much the economy could produce if it were at potential, at that
rate of growth it can sustain
over the medium term without accelerating inflation.
And so, you can actually go to the OECD webpage, OECD.org.
Go to statistics, look for the output gap, and you
can find these numbers for a wide range of countries.
I've just put on this slide four
countries, the United States is here again,
I've put Finland, Japan and Portugal to
give us, you know, some different situations and
we start in 1990 and go until 2010, and you can see, on this
slide, that again, there is the profile of the United States, it's the red bars.
And you can see that the United States has a positive output gap
at the beginning of the 90s and then it's got a negative one.
In other words, it's growing too slowly throughout the 90s until we hit, the
early the, the end of the 90s and then going into the early 2000s.
I'd like you to look, at Japan next, which
is the green bars and Japan is very interesting.
Here you can see that Japan in the early 1990s, was growing way above potential.
It had a positive output gap.
In other words, it was overheating, we might say.
And you can see that as the Japanese financial crisis hit in the
1990s, that this output gap shrinks, and eventually, it becomes negative.
So, you can see they are growing below potential, starting
in the late 90s and going almost to the present time.
This is really long negative output gap which we'll give another name to soon.
Because you know that in the late 90s, the Southeast Asian crisis began.
This hit Japanese banks when they were just kind
of starting to recover from their own financial crisis.
This accounts for the later output gap.
And then we get, of course, the global financial
crisis, which pushes them down again, in, in the 2000s.
You can see Finland here, and Finland's an interesting
story, because, with the fall of the Soviet Union, Finland
kind of moving out of this period of Finlandization,
of kind of a dependence on the Soviet block countries.
You can see, they had an enormous negative output gap in the 1990s.
again, this was not necessarily recession, but it did mean
that GDP was growing a lot slower than it should have.
Okay, which probably aggravated their unemployment problem.
And you can see that as time goes, they come out of it.
They're out of it in the early 2000s, as almost everybody was, except for Japan.
They go back into it a little bit, out, and then in again.
So, you can see this, this sort of varies over time.
If you look at Portugal, which is these
purple lines, you can see a different story.
You can see Portugal with a big positive output gap.
Overheating, growing too fast in the early 1990s.
You can see it dips down, as most of the other countries do in the mid 1990s.
It comes back out in the late 1990s, up until the 2000s, and
then Portugal drops into a negative output gap at the beginning of the 2000s.
And stays there until the present time.
So, just looking at different countries, comparing how much they're
growing with how much they could grow, if inflation were to
be relatively constant and unemployment were to be at a pretty
good level, we can get an idea of where they stand.
And in a sense, what kind of problems they have.
In a way, doing this is like a doctor looking at
a very complex human body that walks into his office and to
make sense of all the different indicators, the different problems or,
or strength of this body, the doctor may take your body temperature.
He may take your blood pressure.
And then, the doctor gets an idea of what might be right.
What might be wrong.
With your physical situation.
This is what we're doing with GDPs as we compare them to potential GDP over time.
[MUSIC]
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