ANNOUNCEMENTS (#1

):
SCHEDULE OF EXAMS:
o TEST #1 –TEST #2 -- TEST #3 – Done!

oFINAL EXAM – APRIL 3, 2009 –
oTime: 8-10 a.m. Rooms to be announced.
o Coverage: ALL TOPICS COVERED IN READING LIST.
3/18/2008 Econ 11 -- Lecture #29 1

ANNOUNCEMENT (#1):
FINAL EXAM – March 28, 2008 at 8:00 to 10:00 am. PERFORMANCE DURING THE THIRD EXAM WAS GENERALLY DISAPPOINTING. AS A RESULT, IT IS LIKELY THAT THE FINAL EXAM WILL HAVE TO BE A REQUIRED EVENT.
3/18/2008 Econ 11 -- Lecture #29 2

LECTURE #29:

TWO MAJOR TOPICS WORLD ECONOMIC CRISIS ECONOMIC GROWTH IN EAST ASIA: RP AND ITS NEIGHBORS
3/18/2008 Econ 11 -- Lecture #29 3

1

WORSE THAN A RECESSION o MAJOR CHARACTERISTICS – AGGREGATE DEMAND FALLS.Lecture #29 2 . MANY MAJOR BANKS IN EUROPE. UNEMPLOYMENT RISES. THE WORLD ECONOMY IS IN A SERIOUS ECONOMIC “RECESSION” o “RECESSION” – A DECLINE IN OUTPUT DUE TO DECLINE IN AGGREGATE DEMAND o “DEPRESSON” – A SEVERE DECLINE OF OUTPUT. AND EVERYWHERE ARE AFFECTED.Lecture #29 4 WORLD ECONOMIC CRISIS (#2) THE WORLD RECESSION – 2008-2009 o BEGAN IN THE US ECONOMY AS A FINANCIAL CRISIS (THE HOUSING MARKET LENDING CRISIS -“SUB-PRIME LENDING”) o LED TO THE FAILURE OF MAJOR INVESTMENT BANKS IN THE US AND THE RESCUE OF MAJOR FINANCIAL INSTITUTIONS IN THE US o RESULT: CREDIT SYSTEM FROZE: BANK SURVIVAL MEANT THEY COULD NOT LEND TO BUSINESSES. MANY BUSINESSES ON THE BRINK OF COLLAPSE o US PRODUCTIVE ECONOMY: SUFFERED FROM FAILURE OF THE CREDIT MARKET TO FUNCTION 3/18/2008 Econ 11 -.WORLD ECONOMIC CRISIS (# 1) TODAY. ASIA. FINANCIAL INSTITUTIONS ARE LINKED TOGETHER THROUGH LENDING AND BORROWING. 3/18/2008 Econ 6 UNEMPLOYMENT 11 -.Lecture #29 5 EFFECTIVELY (BANKS COULD NOT LEND) WORLD ECONOMIC CRISIS (#3) RECESSION SPREADS WORLD WIDE o IN A GLOBALIZED WORLD. SUPPLY OF OUTPUT FALLS 3/18/2008 Econ 11 -. o FINANCIAL DISTRESS AFFECTS THE PRODUCTIVE SECTORS OF THE ECONOMY – DECLINE IN DEMAND. FALL OF OUTPUT. FAILURE AMONG MAJOR LENDERS AFFECTS ALL THOSE WITH BUSINESS TRANSACTIONS WITH THEM.

Lecture #29 7 WORLD GDP LINE TREND WORLD GDP WORLD RECESSION GREAT DEPRESSION 1929-1934 2009 3/18/2008 Econ 11 -. 3/18/2008 Econ 11 -.Lecture #29 8 Price level YP >Y0 Aggregate supply New Aggregate Demand New Expenditure=> Fiscal Stimulus Old Aggregate demand 0 FIRST VIEW: RECESSION & DEPRESSION Y0 Output YP Potential output Low Level Equilibrium Output 9 3 .WORLD ECONOMIC CRISIS (#4) HISTORICAL PERSPECTIVE o “CAPITALISM” AS AN ECONOMIC SYSTEM IS INHERENTLY UNSTABLE o LONG TERM VIEW OF ECONOMIC EVENTS TELL US ABOUT THE REGULARITY OF “BUSINESS CYCLES” – PERIODS OF UPS AND DOWN IN ECONOMIC ACTIVITY o UNDERSTANDING THE INTERACTION OF MARKETS AND GOVERNMENT ACTION CAN SPELL THE DIFFERENCE IN THE EFFECTIVE CURE FOR BUSINESS CYCLES.

E. Y SECOND VIEW E=Y line E'=E+ΔE E E’ E0 ΔE THE FISCAL STIMULUS TO RAISE AGGREGATE DEMAND 450 line 0 Y0 OUTPUT GAP Yp=POTENTIAL OUTPUT 10 (Topic #2) MARKET AND THE STATE : ECONOMIC GROWTH -OUR COUNTRY AND OUR NEIGHBORS 3/18/2008 Econ 11 -.Lecture #29 12 4 .Lecture #29 11 MANY COUNTRIES IN EAST ASIA HAVE ATTAINED VERY HIGH LEVELS OF ECONOMIC PERFORMANCE. 3/18/2008 Econ 11 -.

Lecture 13 IT VERY POOR AGAIN. INDONESIA. TAIWAN.Lecture #29 14 IN PERFORMANCE. MOST OF THE COUNTRIES IN EAST ASIA WERE POOR. #29 SOME COUNTRIES OF EAST ASIA – #2 THESE COUNTRIES EXPERIENCED SPECTACULAR ECONOMIC GROWTH DURING DIFFERENT PERIODS IN THE LAST HALF CENTURY. HONG KONG. BUT TODAY IT HAS LAGGED BEHIND 3/18/2008 Econ 11 -. MALAYSIA. THE PHILIPPINES WAS WELL-POSITIONED FOR GROWTH. ONLY JAPAN WAS HIGHLY ADVANCED ECONOMCALLY. AND THAILAND.Lecture #29 15 5 . SOME COUNTRIES OF EAST ASIA – #3 PERIODS OF HIGH GROWTH 1950s-1970s – JAPAN 1960s-1980s – TAIWAN. SOUTH KOREA. THE WORLD WAR HAD MADE 3/18/2008 Econ 11 -. BUT AS A DEFEATED COUNTRY. AFTER JAPAN (ACCORDING TO EXPERTS). SINGAPORE – “The Four Tigers” 1970s-1990s – MALAYSIA. HONG KONG. THESE COUNTRIES INCLUDE: JAPAN. THAILAND.SOME COUNTRIES OF EAST ASIA DURING THE 1950s. CHINA. TODAY MANY OF THEM HAVE COMPARABLE STANDING WITH OTHER HIGHLY DEVELOPED COUNTRIES IN THE WORLD. PHILIPPINES. INDONESIA – Big ASEAN countries 1990s to the present – CHINA – The Giant wakes up 2000s? – VIETNAM? 3/18/2008 Econ 11 -. SOUTH KOREA. SINGAPORE.

Lecture #29 18 6 .Lecture #29 17 ROLE OF THE STATE “ENABLING” ENVIRONMENT BUILD INSTITUTIONS CONDUCIVE TO GROWTH STABLE STATE POLICIES POLITICAL ENVIRONMENT 3/18/2008 Econ 11 -.Lecture #29 REASONS BEHIND THE SUCCESS OF THESE COUNTRIES ROLE OF THE STATE (“GOVERNMENT”) ROLE OF THE MARKET (“ECONOMIC POLICY”) 3/18/2008 Econ 11 -.PER CAPITA OUTPUT RP FAR BEHIND High rate of growth NEIGHBORS NEIGHBORS CATCH UP RP AHEAD Low rate of growth PHILIPPINES 1946 3/18/2008 1970s 2005 YEARS 16 COMPOUND INTEREST GROWTH RATES Econ 11 -.

ROLE OF MARKET HOW MUCH COMPETITION IS ALLOWED DOMESTIC MARKET – GOODS PRODUCTION FACTORS OF PRODUCTION COMPARATIVE ADVANTAGE 3/18/2008 Econ 11 -.Lecture #29 CONTROL Econ 11 20 ROLE OF THE MARKET: JAPAN COMPETITION – HOW MUCH IS ALLOWED HIGH SAVING RATES ALLOWED HIGH INVESTMENTS.Lecture #29 19 ROLE OF THE STATE: JAPAN “ENABLING” ENVIRONMENT INSTITUTIONS – PHYSICAL AND SOCIAL INFRASTRUCTURE. DISCIPLINED BUREAUCRACY STABLE STATE POLICIES – CONSENSUS DERIVED FROM POLITICAL PROCESS 3/18/2008 PARLIAMENTARY GOVERNMENT UNDER STABLE PARTY -. HIGH EXPORT SURPLUS 3/18/2008 Econ 11 -. EMPLOYMENT ORIENTED LABOR POLICIES LARGE MARKET ALLOWS DIFFERENT MARKET STRUCTURES TO THRIVE HIGHLY COMPETITIVE EXPORT SECTOR.Lecture #29 21 7 .

Lecture #29 23 ROLE OF THE STATE: TAIWAN & SOUTH KOREA “ENABLING” ENVIRONMENT INSTITUTIONS – PHYSICAL AND SOCIAL INFRASTRUCTURE. 3/18/2008 SINGAPORE: ONE PARTY RULE. EMPLOYMENT LABOR POLICIES HIGHLY COMPETITIVE EXPORT SECTOR.Lecture #29 1997 RULE TO Econ 11 22 ROLE OF THE MARKET: HONG KONG & SINGAPORE COMPETITION IN ECONOMIC ACTIVITY DOMESTIC GOODS PRODUCTION COMPETES WITH IMPORTS BUT WITHOUT TARIFFS FOREIGN DIRECT INVESTMENTS AND HIGH DOMESTIC SAVING RATES. HONG KONG: BRITISH COLONIAL-. DISCIPLINED BUREAUCRACY STABLE STATE POLICIES FROM GOVERNMENT DIRECTIVES 3/18/2008 STABLE GOVERNMENT FOSTERED BY POLITICAL DICTATORSHIPS Econ 11 -.ROLE OF THE STATE: HONG KONG & SINGAPORE “ENABLING” ENVIRONMENT INSTITUTIONS – PHYSICAL AND SOCIAL INFRASTRUCTURE INHERITED FROM COLONIAL RULE HIGH RELIANCE ON FREE TRADE.Lecture #29 24 8 . SINGAPORE – “STATIST” BUT MARKET ORIENTED. HIGH EXPORT SURPLUS 3/18/2008 Econ 11 -.

HIGH EXPORT SURPLUS 3/18/2008 Econ 11 -. Good day! Lecture 29 ☺ 3/18/2008 Econ 11 -.Lecture #29 26 9 . HIGH DOMESTIC SAVING. EMPLOYMENT ORIENTED LABOR POLICIES HIGHLY COMPETITIVE EXPORT SECTOR.ROLE OF THE MARKET: TAIWAN & SOUTH KOREA COMPETITION – HOW MUCH IS ALLOWED PROTECTIVE POLICIES SUPPLEMENTED BY MARKET DRIVEN POLICIES TO PROMOTE COMPETITION HIGH FOREIGN DIRECT INVESTMENTS.Lecture #29 25 End of today’s lecture.

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