EC114 Introductory Macroeconomics Applications Lecture, Week 9
J James Reade
12/03/2015
Introduction
- Today: Midterm, guest lectures.
- Tomorrow: Chapters 12–14: Money, Prices, Monetary and Fiscal Policy.
- Rest of term:
- Week 10:
- Tuesday: Classes: What should we expect from the budget?
- Wednesday: The Budget!
- Thursday: Applications Lecture: The Budget!
- Friday: Chapters 17–18: Banking, Debt and (Sovereign) Default.
- Week 11:
- Thursday: Claire Macallan from the Bank of England.
- Friday: Chapters 19–21: Exchange Rates (guaranteed question).
- Unable to cover chapters in full detail.
- Reading all the chapters will be beneficial.
Essay
- Due Friday March 27 4pm.
- Word limit: 2000, strict (no 10%).
- Words after 2000th will not be counted (it’s electronic submission).
- Ability to write succintly and clearly an acquired skill.
- Footnotes do not count (but no obligation to read footnotes).
- Tables and figures do not count (but do not abandon them).
- Harvard style referencing (copy style in academic papers).
- Question Choose one of the guest lectures by Joe Grice, John Redwood and Sam Juthani and answer the following questions:
- Summarise the lecture given by your chosen guest.
- Identify which economic theories covered in lectures that the lecturers referred to. Was the lecturer in agreement with the theory?
- Explain whether you agree with the lecturer.
- All parts equally weighted.
Debates in Class
- Thanks for participating!
- Tutors gave me very positive feedback.
- Attendance low again, but suspect those who fail to attend classes fail to attend lectures.
- Next week:
- I’ll provide some reading material ahead of class on budget.
- Debate on what we should expect from the budget.
Clarification
- More than happy to answer questions.
- No obligation to review your scripts step by step.
- But happy to answer questions about exam.
- Exam marks not up for debate.
- Midterm tests were marked as midterm tests.
- What I mentioned last week was an analysis of exam marks against class attendance.
- Attending more classes was consistent with getting higher marks.
Grice Synthesised
- GDP is total final output (at market/constant prices):
- Total value of final output produced in UK.
- Total income from what UK produces.
- Total available for UK to spend.
- Timing:
- Output data available very quickly.
- Expenditure data available in medium term.
- Income data available last (but most reliable).
- What’s wrong with GDP when it comes to welfare?
- Gross not net.
- Not per capita.
- Not at household level.
- No account of distributional issues.
Grice Data

- Real household disposable income:
- Households are different units than individuals.
- Income spread over earners plus dependants.
- Often dual income, often single-income.

- Do we need to be pessimistic about the UK economy because of these plots?
Grice and Our Course
- Firmly fits in with Core Lecture 1: http://rpubs.com/jjreade/corelec1
- Measurement of national income.
- How is it done?
- What are the problems with it?
- Correspondence between national income and welfare.
Redwood Synthesised
- Does austerity work as an economic policy?
- Step one: We must define austerity. Non-trivial.
- Redwood: “a country in debt with a large deficit should cut spending and raise taxes in order to reduce its deficit”.
- Wikipedia: “the policy of reducing government budget deficits during times of economic recession”.
- Once defined, we can think about (1) theory and (2) evidence.
- Theory:
- Large govt debts/deficits problematic: Crowding out (see tomorrow).
- Business cycles:
- Keynesian insufficient demand: Govt can supply demand, aid co-ordination.
- Automatic stabilisers lead to natural movement in deficit (see tomorrow).
- Evidence:
- Given Redwood definition, movements in govt balance indicative of relative austerity levels.
- Hence claim US has had more austerity than UK, claim that austerity stronger now in UK than it was in 2010–11.
- But Wiki definition includes recession, which rules out such simple interpretations.
- US out of recession hence govt balance improved; UK only recently out, hence govt balance improving.
Juthani Synthesised
- Labour wasn’t that bad:
- Financial crisis was international, was result of financial sector becoming too clever for regulators to keep up with.
- Counter point: Redwood argued Labour allowed leverage to get too high.
- The Coalition has been really bad!
- Cutting deficit in “time of recession”: austerity.
- Targets on debt and deficit missed:
- Does this matter? Can we cut through political blame game?
- Grice talk gives sense of maybe why not: Different statistics tell different story.
- Interesting extra point about monetary policy:
- Had to take burden of expanding economy given austerity, hence continued zero interest rates.

