Typically, such models have three aspects: the 'story', the mathematical model and a graphical representation. In the generation of income account, the balance item is transferred from the production account to the Resources.
Variants of GDP
Net domestic product at factor cost: Net domestic product excluding all production taxes (minus Tind plus subv). Net disposable income of the economy: net national income (at market prices, i.e. including all production taxes) plus balancing item of border transfers.
SNA=3 national accounts
Under the concept of the new SNA, individual public consumption and private consumption are summed up in aggregate "individual consumption". The disposable income of YD households serves as the basis for calculating the household savings rate.
Other statistics that are related to SNA
A difference between the two views may arise from the change in currency and gold reserves at the central bank, and from various statistical discrepancies. As long as price inflation remains 'normal', the logarithmic rate 100(logPt−logPt−1) is a convenient approximation and is often preferred for technical reasons.
Critique of National Accounts
The linear approach gives a good estimate for the slope of the curve over the years, but a bad estimate for the behavior at a very low national income, for which we do not have observations (and do not want to create by experiment ! ). In the long run, the saving paradox disappears, as saving increases the growth potential of the economy, lowers the interest rate and increases investment. These mechanisms are absent in the simple model with I = ¯I. 16) is only an identity and does not describe economic behavior.
Demand for money and bonds
In the short run, we assume that $W is exogenous, so an increase in income will cause a decrease in bond demand. There is no convincing evidence of a long-term decline in the M/$Y ratio reported for the US. This characteristic would imply that the inverse ratio $Y/M, the so-called 'velocity of money', increases.
Equilibrium in the money market
Graphically, the vertical line Ms = ¯M intersects the money demand curve at a unique point, which determines the interest rate i. The central bank can use three different tools: open market operations, reserve requirements, discount rate. In open market operations, the central bank buys or sells bonds or other assets and pays or receives money.
Price of bonds and interest rate
The original intention was to guarantee the banks' savings accounts; Today, reserve requirements are merely a means of controlling the money supply. A higher discount rate does not automatically imply a higher interest rate on the money market, although it can reasonably be assumed that there is some positive influence.
The money multiplier
The value 1/{c+θ(1−c)} is called the money multiplier, as it tells how much the money supply increases if the central bank prints one additional unit of money. If we look at the goods and financial markets together, then both the goods market (IS) and financial market (LM) equilibrium conditions must hold. In the tradition of Keynes and Hicks, the focus is on the behavior of income Y and interest rate i.
Investment function
Note that firms have three sources of financing investment: internal financing from current profits, loan financing with a 'price' that depends on an interest rate (perhaps adjusted for inflation, hence 'real' rate), and new equity capital through shares to reach out.
The IS curve
Holding G¯ and T¯ fixed, a given interest rate i uniquely determines a corresponding amount of income Y, subject to some mathematical assumptions about the shape of the function I(Y, i), etc. The IS curve is negatively sloped, as a demand curve (the quantity of goods depends on the price), but it is not a demand curve, but instead describes equilibria in the goods market. The demand for investments falls and with it the overall total demand in the goods market.
The LM curve
One gains a lower demand Y at the same time the entire IS curve shifts to the left, since one gets a lower output Y for each given i. On the LM curve in the space (Y, i) you move to the right, so the equilibrium income Y rises. Only if income (output) Y increases does the money demand curve shift to the right until equilibrium is again reached.
Fiscal policy in the IS-LM model
Only then do investors adjust I = I(Y, i) to lower Y and consumers will also lower C. From the start, investors not only react to lower Y, but also to lower i. These effects are partly ambiguous, although we can assume that, in general, a contraction will lower the demand curve for the good.
Monetary policy in the IS-LM model
This effect does not appear in the model and could moderate the shift of the IS curve to the left. expansionary monetary policy) or can reduce it (restrictive or contractionary monetary policy). Supply and demand: In contrast to goods and financial markets, where the supply comes from powerful companies or a powerful central bank, and the demand side is small households, the labor market is supplied by households, and the demand comes from companies (and the Government). The share of the labor force in the active population (definitions vary, e.g. resident population from 15/18 to 65) is called the (labor) participation rate.
Wages
However, not all persons in the resulting difference are unemployed, as approximately 100,000 must be deducted as soldiers or on leave for childcare etc., to calculate the unemployment rate. Blanchard's definition of efficient wages is a little unclear, as he introduces it as 'linking wages to productivity', which is a common feature of all wages, as will be seen from the pricing mechanism below. As wait function one can use. where Pedenote is the expected price level in the goods market, uis the unemployment rate, z is used for 'other influential variables in the labor market'.
Prices
Prices and wages in equilibrium
In the interpretation of Blanchard's textbook, the labor market is in equilibrium when price and wage determination coincide and when there is natural unemployment. So in the short term the labor market is in disequilibrium, but in the medium term it tends towards equilibrium. The short-term equilibrium Y˜ of the nominal IS-LM model in the (Y, i) diagram does not have to coincide with the 'natural output' Yn of the labor market.
The aggregate supply: the AS curve
Therefore, an 'unnaturally' high production can only be achieved if prices are higher than expected.
The aggregate demand: the AD curve
It is a true demand curve because (viewed inversely) it describes the quantity demanded in the goods market at a given price. For a given functional form and under certain assumptions, it is mathematically feasible to solve the LM identity for the interest, substitute i into the IS function, and then solve for Y. Since M/P has a positive impact on Y, the price level in the denominator has a negative impact on output, just as it should be.
Movements in the AS-AD world
As an example for an autonomous shift of the AS curve, Blanchard mentions the OPEC shocks of the 1970s, which he interprets as an increase in the make-up µ. The OPEC price shock led to additional inflation that was not rooted in the price-wage spiral of the domestic economy. Some economists accept stronger fluctuations in the NAIRU (in the Blanchard model such fluctuations would result from changes in µ etc), which however weakens the meaning of the whole concept.
Okun’s law
If the unemployment rate in t −1 exactly matches the NAIRU, it falls below the NAIRU in t. Evidence for Austria: For Austria, the evidence for the existence of Okun's law, in the form given above, remains inconclusive (see Figure 13). While years of good economic performance actually have lower unemployment on average than years of economic slowdown, the autonomous development of the labor market dominates: the decline in the labor force in Austrian industry, or rather a strong increase in labor productivity, 1980 —.
Growth of money and inflation
The growth rate of Y is written as gY in a clearer notation, while in Okun's law it is denoted by g. Starting from an equilibrium situation with u = un and g = gn and therefore gM = gn+πh for some πh, political forces – obviously the forces in power of the money supply and therefore central banks rather than government agencies – want to reduce π to a lower level of πl . In contrast to a closed economy, an open economy communicates with the rest of the world.
Stylized facts of the open goods market
For example, Figure 15 shows the dramatic decline in the UK share in the 1970s, which may be due to the UK's move to the European Community from a Common Economic Area with Austria in EFTA, and the decline in Japan's share in the European community. the 1990s, when Austria became a member of the European Union. In contrast, note from Figure 16 that the German trade share is subject to only small fluctuations.
Nominal and real exchange rates
So, with low inflation in Austria and higher inflation on the 'world market' there is a real depreciation, even if the nominal exchange rate is constant. A relatively high inflation in Austria or a price reduction on the world market and constant nominal exchange rate would imply a real appreciation. There is a difference between deliberate exchange rate changes as a policy tool, devaluation and revaluation, and normal market fluctuations, depreciation and appreciation.
The open financial market: the interest parity
The expected depreciation of the domestic currency causes a negative (Et+1e −Et)/Et ratio and thus a relatively higher interest in the domestic economy, the expected appreciation implies a higher interest abroad.
The open goods market
Although the additional demand in N X and thus in Y is partially covered by imports, there is still a positive net effect. Dynamics: Because the opposite direct effect of ε in the equation for N X occurs immediately, while the effects on export demand abroad and on import demand in the home economy occur with a delay, after a depreciation one often observes first falling net exports (imports become more expensive with same) and then a gradual increase, according to Marshall-Lerner, beyond the initial value. Some economists see the letter 'J' in this reaction and they call this effect the J curve.
Investment and saving in an open economy
The IS-LM—model in the open economy
The change in the money supply causes a shift from the LM curve to the rigid IS curve. Since E and Ee must coincide in the longer run, one sees from the UIP that i = i∗ must hold, i.e. while in the Blanchard variant with flexible exchange rate the expected exchange rate Ee is exogenous and fixed, which poses certain logical problems , Mundell- .
