1. EC-111: British Economy
Recent Macro Economic
Policy and Trends
Dr Catherine Robinson
F35, Richard Price
Office hours: Monday 10.30-11.30 and Thursday 9.30-10.30
Appointments: c.robinson@swansea.ac.uk
Week 1:2 1
2. Picking up from yesterday
Macro economy policy targets may be defined as the
following variables
Employment
Inflation
Balance of Payments
Economic growth
Debt
Policy levers
Fiscal policy
Monetary policy
Exchange rate
Incomes and pricing policies
Week 1:2
2
4. There are trade-offs
Between inflation and unemployment
The Phillips Curve (1958)
Curbing government spending lowers earnings for
public sector workers or reduce employment
Raising the exchange rate makes exports relatively
more expensive and lowers (manufacturing) output
So how do you balance multiple objectives?
Instruments are not independent of one another
AND instruments have in the past become
objectives
Exchange rate instrument <<more when we
discuss the ERM>>
Week 1:2
4
5. The Phillips Curve
Each dot represents a
year
1913-1948
As wages increase
(inflation)
unemployment declines
Week 1:2
5
6. Theory of Economic Policy
Tinbergen (1952)
Fixed targets
Tinbergen’s rule – there should be at least as many
instruments as there are objectives
Week 1:2
6
7. Two instruments, two objective
case
Week 1:12
7
O1
O2
Instrument 1 (eg
monetary policy)
Instrument 2 (eg fiscal
policy)
0
I1`
I2`
Source: Griffiths and Wall, 2001
Movement away from the
origin is an expansionary
path
O1 is objective 1 (internal
balance) at a particular
target value
O2 is the objective 2
(external balance) at a
particular target value
E
Assume O1 is full
employment and
O2 is balance of
payments equilibrium
8. Two instruments, 3 objective case
Week 1:2
8
O1
O2
Instrument 1 (eg
monetary policy)
Instrument 2
(eg fiscal
policy)0
I1`
I2`
Source: Griffiths and Wall, 2001
O3
G
F
E
now with O3 –
assume it is
economic growth
(positively sloped)
9. Flexible targets (Theil, 1956)
Pre-supposes that there is welfare loss associated with
missing the fixed targets
Implicitly assumes that there is a social welfare function
for the population
It then becomes a question of weighting
Week 1:2
9
10. Satisficing’ (Mosley, 1976)
Policy makers are satisficing agents, influenced primarily
by recent levels
Looking at the 1946-71 period Mosley found that any
balance of payments deficit resulted in policy change – so
that only zero or positive BoP was satisfactory.
Benchmark for unemployment was variable over time
Week 1:2
10
11. Which of these definitions best
describes the term ‘satisficing’?
Week 1:2
11
1. Bureaucratic organisations
maximise profits
2. Bureaucratic organisations
continually strive for the best
possible outcomes
3. Bureaucratic organisations
react only when welfare
reaches an unsatisfactory
level
12. Britain in Context
GDP – from national income accounting
Gives national wealth figures
Need to convert to per capita measures for welfare index
Employment rates
Activity rates
Inflation rates
Balance of payments
Exchange rates
Debt levels
Productivity – labour (and total factor)
A more esoteric measure but designed to capture efficiency
Is considered to be one of the better measures of standards of living
Who is our comparator?
European Union members
Frontier economies – USA
Commonwealth
Week 1:2
13. Where can I find out what the UK looks
like?
Economic Outlook from the OECD provides the most up to date
national statistics in one place
http://www.oecd.org/statistics/
Alternative data sources for international comparisons....Eurostat;
EUKLEMS (for industry comparisons)
Also, very useful is the Penn World Table
https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php
This has data from 1950-2010 on about 180 countries
National data source – Office for National Statistics
www.statistics.gov.uk
Sub-national data – StatsWales
Alternatively – The Economist’s Big Mac Index
Week 1:2
15. Harmonised unemployment rates
(% of civilian labour force)
Week 1:1
15
0
5
10
15
20
25
Australia France Germany Greece Ireland Israel (1) Spain United
Kingdom
United
States
Euro Area
2010
2011
OECD outlook 2013
17. British GDP in 2005 International
Dollars (PPP converted)
Week 1:2
0
500000
1000000
1500000
2000000
2500000
3000000
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Source: Penn World Tables, 2011
18. Nominal GDP Growth
(%change from previous year)
Week 1:2
Source: OECD Outlook 2013
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Australia
France
Germany
Greece
Ireland
Spain
United Kingdom
United States
Euro area
Total OECD
19. Dollar exchange rates over time
Week 1:2
0
0.5
1
1.5
2
2.5 1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
exrate$
FRA
GBR
Source: Penn World
Tables, 2011
21. Balance of Payments
Current account as %GDP
Week 1:2
-12
-10
-8
-6
-4
-2
0
2
4
1995199619971998199920002001200220032004200520062007200820092010 France
Ireland
Italy
Spain
United Kingdom
United States
22. UK Imports and Exports over
time
Week 1:2
0
5
10
15
20
25
1960s 1970s 1980s 1990s 2000s
Imports Exports
24. A tiny word of caution..
Lies, damned lies and statistics...
It is important that we are comparing like with like
Whilst there is broad agreement on national accounting
practices, in reality, all national statistics agencies count
differently
Recent US treatment of computer software in the capital
account <<more on this with the 1990s ICT productivity
paradox>>
Slightly pedantic, and easy to get bogged down in
detail
Week 1:2
26. Labour productivity growth
GVA per hour worked
Week 1:2
0
10
20
30
40
50
60
70
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
France
Ireland
Italy
United Kingdom
United States
Source: OECD Stats extract 2011
27. GDP per person (2005$) 1950-2009
Week 1:2
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
AUS
DNK
GBR
USA
FRA
Source: Penn World
Tables, 2011
28. GDP per hour worked Growth %pa
(PPP converted $, 2005 prices)
Week 1:2 Source: Penn World
Tables, 2011
-6
-4
-2
0
2
4
6
8
10
12
14
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
GDP growth
29. So what can be said about UK
performance?
Labour productivity has traditionally lagged behind
Considerable work has been devoted to improving the proxies
of skills and capital in recent years
Are Britons less skilled than other nations?
Do they invest less in capital, or the wrong sort of capital?
Sources of Growth literature also focuses on disaggregated
national performance
Is it down to the manufacturing/service balance in the
economy?
The public/private sector balance?
We will explore these over the next few weeks
Week 1:2
30. Spending the next few weeks
looking at why
• Historical context
The decline of imperialism and the move from the
Commonwealth to Europe
Political context is crucial
Economic policy is a big part of this
We live in interesting times
The current financial crisis is the biggest since the 1930s
and is causing economists (particularly) to re-evaluate
some fundamentals…
Week 1:2
31. Next week...
A lesson in UK (and European) economic history
When was national accounting invented?
What happened after WWII?
The birth of the welfare state
Through to the oil crisis of the 1970s and the ‘Winter of
Discontent’
Week 1:2
32. References
For this week...
Griffiths and Wall (2011) 12th Edition – handy for the Tinbergen theory
Mosley (1976) Towards a Satisficing theory of Economic Policy’, The
Economic Journal, 86(341), 59-72 (available on JSTOR)
O’Mahony, M. and C. Robinson (2007) UK Growth and Productivity in an
International Perspective: Evidence from EUKLEMS, National Institute
Economic Review, 200, April, 2007, 79-86
For next week if you want to look ahead...
Alford, BWE (1988) ‘British Economic Performance 1945-1975’
Week 1:2
