Accelerated depreciation, 153
Acemoglu, Daron, 58
Additional worker effect, 36–37
Africa, 219–221
Agricultural Productivity Program for Southern Africa, 208–209
Animal spirits, 155
additional worker effect, 37
balance of payments crisis, 92–95
barter in, 63
currency board, 78–80
fiscal deficits, 114
net debt, 164–165
Asia
Asian tigers, 48–49, 52, 95, 152
crisis of 1997-1998, 95–97, 202–203, 213
extreme poverty, 220
and globalized production, 205
Average income, 42–43
Azerbaijan, 174
Balance of payments, 162. See also Current account
Balance of payments crisis, 90–97
Banks. See also Central banks
and money multiplier, 73–74
and reserve requirement, 72
Barter, 63–64
Bernanke, Ben, 75
consumption and saving, 135
hyperinflation, 117
per capita income, 41–42
Brazil
current account deficit, 166–168
financial contagion, 100–101
hyperinflation, 117
Bretton Woods Agreement, 67
Bretton Woods conference of 1944, 207, 209–210
Bubbles, financial, 201
Budget surplus, 186
Burundi, 42
Business cycle
and economic growth, 43
and fiscal deficit, 190–192
and GDP, 6
and tax collection, 190
and unemployment, 12
Capital
cost of, 153
environmental, 149
reproducible/nonreproducible, 149
share of GDP, 50–52
Capital flows
and developing countries, 212–213
Central banks, 68–69
and fiscal deficits, 113–114
objectives of, 71
speculative attack, 90
consumption, 135–138
current account, 168
deficits, 89–90
discouraged worker effect, 37
fiscal council, 192
job loss in, 28
labor/capital shares, 50–51
per capita income, 42
recession of 1999, 20
unemployment, 32
urbanization, 45
China
economic growth, 58–59
fiscal policy, 193
investment, 152
per capita income, 41–42
poverty reduction, 219–222
saving rate, 141
trade surplus, 15
and United States, 227–228
Closed economy, 69
Collateralized debt obligations (CDOs), 102–104
Compensatory and Contingency Financing Facility (CCFF), 173, 209
Compensatory Financing Facility (CFF), 173, 209
Consolidated public sector, 184
Consumer confidence, 130–131
Consumer price index, 12
and current account, 170–171
current/permanent income, 132
durable goods, 148–149
government, 183
income effect, 139–140
and interest rate, 138–140
intertemporal decisions, 131
and liquidity constraint, 134–135
pattern, 151
and recession, 135
and saving, 129–133
substitution effect, 12, 139–140
Contagion, global, 97–101, 213
Costa Rica, 10
Cost inflation, 126–127
Cost of capital, 153
Countercyclical spending, 190
Credibility of central banks, 81, 115
Credit
rationing, 154
Credit crunch, 104
Crises, financial, 105–106, 109
Cultural factors, 56
Currencies, 3
and capital inflows, 96
euro, 67–68
and fiscal deficits, 88
and fixed exchange rates, 107
Currency board, 78–80
Currency wars, 225–227
Current account, 161–177, 235. See also Fiscal deficits
balance, 13–15
determinants of, 169–172
exports and imports, 13–14, 161, 170
and external savings, 163–164
and interest rate, 169
interpretations of, 162–166
NFP balance, 165
normative/positive view of, 173–174
permanent/temporary shocks, 170–171, 174–175
savings and investment, 162–163, 169, 186
Debt, public, 183, 189–190. See also Fiscal deficits
Debt crisis of 1980s, 200, 210
Deficits. See Current account; Fiscal deficits
Deflation, 13
Deglobalization, 229
Demand
labor, 24–25
and monetary expansion, 122
money, 68
Denmark, 192
Developing countries
and agricultural subsidies, 216
and capital flows, 212–213
export processing zones (EPZs), 205–206
fiscal councils, 192
and globalization, 212–216
government investment, 184
government revenue, 181–182
and internationalized production, 204–205
and international loans, 200
and international trade, 199
Direct taxes, 180–181
Discouraged worker effect, 37, 233
Division of labor, 45–46
depreciation of 2010, 227
Durable goods, 148–149
East Asian Miracle, The, 49
Economic and Monetary Union (EMU), 187
Economic cycles, 6
Economic growth, 6, 19, 41–60, 232–233
and business cycles, 43
cultural factors, 56
defined, 41
and GDP, 41
institutional factors, 54–60
labor/capital shares of, 50–51
and monetary base, 68
natural resources, 59–60
and per capital income, 42–43
and policy, 53–59
and poverty, 219–220
and saving, 142
structural characteristics, 55
and technology, 51–53
Economic models, 26
Economic shocks, 170–171, 174–175
Education and training, 149
Education index, 11
Elephant curve, 223
Employment
full, 30
and GDP, 19–20
and output, 28
and production, 20–25
public/private, 29
Employment contracts, 123–124
Environmental capital, 149
Equilibrium
labor market, 28
money market, 69
Estonia, 78
Euroization, 80
European Central Bank (ECB), 75, 79, 107–109, 172, 187
European Fiscal Compact, 189
European Union (EU)
and Brexit, 228–229
unemployment rate, 33
Euro zone crisis of 2009, 106–109, 189
Exchange rate mechanism (ERM), 188
Exchange rates, 61–62, 76–86. See also Fixed exchange rate system
and depreciation, 76
and exports, 84–86
and investing, 83–84
law of one price, 77
Expansion. See Economic growth
Expenditure taxes, 180
Export processing zones (EPZs), 205–206
Exports, global, 196–197. See also Imports and exports
External savings, 163–164
Extreme poverty rates, 220
Federal Reserve, 20, 68–69, 101–105, 193
Financial investment, 147
First world countries, 199
Fiscal balance, 180
Fiscal budget, 180
Fiscal councils, 192
Fiscal deficits, 14–15, 186. See also Current account
and central banks, 113–114
and currency devaluation, 88
cyclical pattern of, 190–192
and fiscal policy, 187
and fixed exchange rate system, 87–88, 90
and flexible exchange rate system, 88–89
government debt, 180
and inflation, 113–114
Fiscal policy, 179–194
countercyclical/pro-cyclical, 236–237
current expenditures, 183
euro zone, 186–190
fiscal budget/balance, 180
fiscal council, 192
and fiscal deficits, 187
fiscal spending, 183
government revenue and expenditures, 180–185
and monetary policy, 192–194
structural fiscal balance, 191
taxes, 180–181
Fiscal surplus, 186
Fixed assets, investment in, 147, 151–152
Fixed exchange rate system, 77–80, 85–86, 234
and balance of payments crisis, 90–91, 95
common currency, 106–107
and fiscal deficits, 87–88, 90
and inflation, 88
Flexible Credit Line (FCL), 175
Flexible exchange rate system, 81–85, 88–89, 234
Floating exchange rates. See Flexible exchange rate system
Fluctuations, economic, 3
Foreign currency reserves, 92
Foreign direct investment (FDI), 159–160, 202–203
Friedman, Milton, 86
G-20 economies, 193
General Agreement on Tariffs and Trade (GATT), 208
General Theory of Employment, Interest and Money, The, 155
fiscal policy, 193
government investment, 184
hyperinflation, 117
unemployment, 108
Unification Treaty, 214
Gini coefficient, 221
Global capitalist system, 218
Global contagion, 101
Global crisis of 2008, 192–193, 201–202
Globalization, 38, 97–98, 195–229
arguments against, 211–219
benefits of, 215
and Brexit, 228–230
case for, 219–222
as cause of crises, 211–213
and developing countries, 212–216
dissatisfaction with, 228–229
and economic institutions, 206–209
as economic integration, 196
global exports, 196–197
and inequality, 221–224
and international capital flows, 200–203
international trade, 198–203
and macroeconomics, 16–17
and multilateral agreements, 209–211
new views on, 223–225
and production, 203–206
Globalization Paradox, The, 229–230
Gold standard, 66–67
Government. See also Fiscal deficits; Fiscal policy
central/general, 184
consumption and investment, 183–184
debt, 187
deficit, 187
expenditures, 183–185
fiscal balance, 180
fiscal budget, 180
interest on public debt, 183
and market imbalances, 218–219
private sector transfers, 183
structural balance rule, 191
taxes, 180–181
Great Depression of 1929, 194, 197
Great Recession of 2008, 15, 20, 75, 127, 237
Greece, 107–108, 171–172, 188–189
Greenspan, Alan, 157
Gresham, Sir Thomas, 64
Gresham’s law, 64–65
Gross domestic product (GDP), 4–10, 232
and business cycles, 6
contributions to, 5
and economic growth, 41
and happiness, 9
and income, 4
and investment, 146
investment share of, 151–152
labor/capital shares of, 50–52
and national saving, 141
nominal/real, 6
and population growth, 47
and production, 6
and R&D, 46–47
and unemployment rate, 19–20
and well-being, 7–8
and world trade, 196–198
Gross investment, 151
Gross national income (GNI) per capita index, 11
Growth. See Economic growth
Happiness, 9–11
Harmonized unemployment rate, 33
Hayashi, Fumio, 143
High-tech companies, 53
Housing bubble, 218
Housing sector, 102–104, 147, 156
Human Development Index (HDI), 11
Hyperinflation, 117
Hysteresis, 37–38
Iceland, 10
Imports and exports, 13–14, 161, 170, 236
average, 42–43
and consumption-saving decision, 130
and GDP, 4
global distribution, 223–224
and happiness, 10
and inflation, 120
labor share of, 50
pattern of, 133
permanent, 132
and saving, 133
Income and property taxes, 180
Income effect, 139–140
India, 221–222
Indirect taxes, 181
Industrial Revolution, 196
Industrial sector, 45
Inequality, 220–224
Inflation, 2–3, 12–13, 111–127
and budget deficits, 13
and central banks, 81, 112–116
cost inflation, 126–127
costs of, 117–121
expectations, 123
and fiscal deficits, 113–114
and fixed exchange rates, 88
and floating rate system, 81
and income, 120
and money supply, 69
and poverty, 120
and production costs, 126–127
reducing, 111–112
sacrifice coefficient, 124–125
and unemployment, 121–122, 125
Inflationary inertia, 123–124
Inflation rate, 233–234
Inflation targeting, 81
Inflation tax, 88–89
Insolvency, 171
Institutional factors, 54–60, 160
Intellectual property rights, 208
Interest rates
consumption and saving, 138–140
and cost of capital, 153
and current account balance, 169
low, 105
and monetary policy, 72–74
short-term, 74
International Bank for Reconstruction and Development (IBRD), 207
International capital flows, 200–203, 236
International Center for Settlement of Investment Disputes (ICSID), 207
International Development Association (IDA), 207
International Finance Corporation (IFC), 207
International financial crisis of 2008-2009, 16–17
International Monetary Fund (IMF), 172, 206–207, 209–210
International reserves, 87–88, 90
International trade, 198–203
barriers to, 197–198
and developing countries, 199
Intertemporal decisions, 131
Inventories, 20–21
Inventory investment, 147
and corporate taxation, 153
and cost of capital, 153
and credit rationing, 154
and current account, 162–163, 169
determinants of, 153–154
and economic fluctuations, 155
and economic growth, 145–146, 153
and exchange rates, 83–84
foreign direct investment, 159–160, 202–203
forms of, 147–151
government, 183–184
gross/net, 151
irreversibility of, 154
natural resources, 149
patterns, 151–152
and production, 145
share of GDP, 151–152
current account, 166
fiscal policy, 193
investment, 151–152
saving, 142–144
unemployment rate, 35
Kennedy, Robert, 7–8
Keynes, John Maynard, 154–157
Keynesian animal spirits, 155–159
Korea, 56
Krugman, Paul, 95
Labor contracts, 122–124
Labor force, 19–20
demand for, 24–25
marginal productivity of, 23–24
and maximizing profits, 22–23
surveys, 33
women in, 34
Labor market, 233
equilibrium, 28
and unemployment, 12, 30, 36, 39
World Bank index of, 31
Labor negotiation, 124
Labor supply
and income share, 50
and real wage, 26–28
Lakner, Christopher, 223
Latin America
deficits, 15
economic growth, 48
extreme poverty, 220
and globalized production, 205
happiness levels in, 10
investment, 152
labor income, 50
saving rate, 141
trade, 54
unemployment in, 31–32
Law of one price, 77
Leisure, 25
Life expectancy index, 11
Liquidity constraints, 134–135
Liquidity requirements, 72
Long-term employment contracts, 123–124
Lost decade, 210
LTRO, 75–76
Luxembourg, 42
Maastricht Treaty, 186–188
Macroeconomics
and globalization, 16–17
key issues of, 1–3
Malthus, Thomas, 47–49
Marginal productivity, 21, 23–24
Market fundamentalism, 218
Mexico
balance of payments crisis, 91–92, 213
debt moratorium, 210
government spending, 174
net debt, 164
per capita income, 9
workers’ remittances, 168
Middle East, 220
Milanovic, Branko, 223–224
Models, economic, 26
Monetary policy, 71–76
expansionary/restrictive, 72
and fiscal policy, 192–194
and interest rates, 72–74
quantitative easing (QE), 75
Money, 61–68
backed/fiduciary, 66
coinage, 65–66
demand for, 68
dollar standard, 67
gold standard, 66–67
history of, 64–68
and prices, 62
silver, 66–67
uses of, 62
value of, 62–63
Money market, 68–71
Money multiplier, 73–74
Money supply, 68–71
Moratorium, 15
Multilateral Investment Guarantee Agency (MIGA), 207
Multiplier effect, 73
National savings, 138–142, 162–163
Natural rate of unemployment, 30–31
Natural resources, 59–60, 149, 183, 191
Net creditor, 163
Net debtor, 163
Net external assets position (NEAP), 163, 169
Net factor payments (NFPs), 165
Netherlands
natural gas discovery, 191
unemployment rate, 35
Net international investment position (NIIP), 163
Net investment, 151
Net payments to domestic production factors, 165
New Loan Agreements (NLAs), 175
Nicaragua, 117
Nigeria, 181
Nominal GDP, 6
Nominal wage, 23
Nonfinancial public sector, 184
Nonreproducible capital, 149
Nontariff barriers, 197
North Korea, 56
Norway, 9
Open economy, 162–163
Open markets, 53–54
Organisation for Economic Co-operation and Development (OECD), 48
Output, 50. See also Production
and employment, 28
and population growth, 43–44
Pakistan, 174
Panama, 78
Paraguay, 192
Peak of economic cycle, 6
Per capita income, 2, 9, 41–43
Permanent and temporary shocks, 170–171, 174–175
Philippines, 96
Physical plant, 147
Policies, economic, 53–59. See also Fiscal policy; Monetary policy; Trade policy
Political institutions, 54–59
Population growth, 43–44, 47–49
Populism, 224–225
Portugal, 107–108, 172, 188–189
Positive externality, 53
Poverty, 2
and economic growth, 219–220
and happiness, 9–10
and inflation, 120
Precautionary Liquidity Line (PLL), 175–177
Precautionary saving, 135
Price determination, 61
Prices
liberalization of, 212–214
and monetary expansion, 121–122
and money, 62
and wages, 122
Price stabilization, 120
Private financial surplus, 186
Private sector transfers, 183
Privatization, 212–213
Procyclical taxation, 190
Production
and employment, 20–25
fluctuations in, 21
and GDP, 6
and inflation, 126–127
internationalization of, 203–206
and investment, 145
marginal productivity, 21, 23–24
Production function, 20–22, 49–50
Profits, 22–23
Progressive tax, 181
Protectionism, 227–228
Public sector, 184
Public spending, 183
Public surplus, 186
Purchasing power parity (PPP), 8–9, 77
Quantitative easing (QE), 75, 108–109, 194
Reagan, Ronald, 125
Reagan administration, 112
Real estate, 147–148
Real GDP, 6
Recession of 2001, 101
Recession of 2008, 15, 20, 75, 127, 237
Recessions, 6
and consumption, 135
and unemployment, 19–20, 37–38
Regional contagion, 101
Rent-seeking, 59–60
Reproducible capital, 149
Research and development (R&D), 46–47, 151
Residential structures, investment in, 147–148
Resource curse, 59–60
Robinson, James, 58
Rodrik, Dani, 229
Russia, 212
Russian crisis of 1998, 98–100
Sacrifice coefficient, 124–125
Sala-i-Martin, Xavier, 219, 221, 229
Sargent, Thomas, 113
Saudi Arabia, 181
Savings
and age distribution, 138
and consumption, 129–133
and economic growth, 142
external, 163–164
and interest rate, 138–140
patterns, 133
precautionary, 135
saving rates, 140–144
Self-fulfilling prophecies, 157
Services sector, 45
Shocks, economic, 170–171, 174–175
Solow, Robert, 51
Soros, George, 218–219
Southeast Asia, 152
per capita income, 42
Sovereign debt crisis, 171–172, 188–189
Sovereign loans, 171
Spain, 107
labor market rigidity, 39–40
per capita income, 42
tourism, 168
unemployment, 108
Specialization, 45–46
Speculative attack, 90
Standardized unemployment rates, 36
State. See Government
Stiglitz, Joseph, 211, 215–217
Structural fiscal balance, 191
Subprime mortgage crisis, 79, 101–106, 148, 194
contagion, 213
and FDI, 203
and international capital flows, 201–202
and investment, 156–157
Substitution effects, 12, 139–140
Sweden, 35
Switzerland, 35
Systemic risk, 201
Taiwan, 48
Tanzania, 65
Technological progress, 21, 46–47
and economic growth, 51–53
and international trade, 199
Terms of trade, 174
Thailand, 95–96
Third world countries, 199
Third world debt crisis, 164
Total factor productivity (TFP), 50–51
Tourism, 168
Trade policy
balance, 13–14, 54, 165–166, 236
global exports, 196–197
international, 198–203
wars, 227–228
Trade-Related Aspects of Intellectual Property Rights (TRIPS), 208
Treaty of Rome, 186
Triennial Surveillance Review, 177
Trough of economic cycle, 6
Uncertainty, 38–39
Unemployment, 2
and business cycle, 12
causes of, 38–39
and labor markets, 12, 30, 36, 39
sacrifice coefficient, 124–125
and uncertainty, 38–39
Unemployment rate, 11–12, 30–40
and additional worker effect, 36–37
data collection, 34–35
and discouraged worker effect, 37, 233
and GDP, 19–20
harmonized, 33
and hysteresis, 37–38
labor force surveys, 33
natural, 30–31
standardized, 36
and worker classification, 32–36
Unilateral transfers, 165
United Kingdom, 152, 184, 215, 217–218, 228–230
United Nations Monetary and Financial Conference, 207, 209–210
United States
and China, 227–228
consumption and saving, 134–135
current account, 166
deficits, 14–15, 161–162, 164, 166
fiscal council, 192
fiscal stimulus, 193
interest on public debt, 184
investment, 151–152
as net debtor, 164
real estate, 147–148
recession of 2007-2008, 15, 20, 38–39
taxation, 181
workers’ remittances, 168
and world output, 4–5
Urbanization, 45
Venezuela, 181
barter in, 63
inflation, 119–120
per capita income, 41–42
Wage contracts, 122
Wage indexation, 123
Wages. See also Income
labor negotiation, 124
minimum, 31
nominal, 23
and prices, 122
Washington Consensus, 210–211
West Germany, 56
Women in labor force, 34
Workers’ remittances, 168
Work supply, 25–26
World Bank Group, 207–210
World Happiness Report, 9
World Trade Organization (WTO), 208
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Felipe Larraín B. is Professor of Economics at Catholic University of Chile, was Director of the Latin American Center of Economics and Social Policies (CLAPES UC), and was Finance Minister of Chile twice, from 2010 to 2014 and from 2018 to 2019. The coauthor (with Jeffrey D. Sachs) of Macroeconomics in the Global Economy and (with Beatriz Armendáriz) of The Economics of Contemporary Latin America (MIT Press), he has published fifteen books and more than 120 scholarly articles. He has been named Finance Minister of the Year for Latin America and the Americas several times.