NIS Economics 2014- The role of Kazakhstan’s

government in the macro-economy; other policies and their application

Today we will look at:

The role of the Kazakhstan’s government in improving the macro-economy in terms of: GDP, HDI, Inflation, Unemployment, Trading position (BofP)

The role of Monetary Policy

Fiscal Policy

Supply side policy (taxation)

Exchange rate policy – The reason for the Kazakhstan’s devaluation and its implications.

Kazakhstan’s government and its macroeconomic objectives

WHAT IS THE ROLE OF THE GOVERNMENT IN THE MACROECONOMY?

To make sure the economy is strong

this means low inflation, strong economic growth and low unemployment.

HOW DOES THE KAZAKHSTAN GOVERNMENT ACHIEVE THESE GOALS?

By using:• Monetary policy• Fiscal policy• Supply side policy and• Exchange rate policy

MONETARY POLICY

Monetary policy: monetary policy deals with the money supply, lending rates and interest rates and is administered by a central bank.

For example: lowering of the interest rates, or raising interest rates.

MONETARY POLICY – STIMULUS (GROWING THE ECONOMY

The government can either stimulate the economy (grow the economy) by lowering interest rates, or slow the economy by increasing interest rates, lowering of the cost of borrowing.

A lowering of interest rates will lead to an increase in borrowing and investment, consumption, employment and economic growth- This is a stimulating monetary policy because it stimulates economic growth.

However, higher economic growth will contribute to higher inflation in the economy, ceteris paribus.

MONETARY POLICY – CONTRACTING THE ECONOMY (SLOWING ECONOMIC GROWTH

An increase in interest rates will increase the cost of borrowing and less people will borrow and invest in the economy.

This will lead to less spending, an increase in unemployment and reduce the level of economic growth.

Lower economic growth will also help to lower the inflation rate, ceteris paribus.

MONETARY POLICY – THE PROBLEM OF INFLATION

An lowering of interest rates will increase inflation and is therefore not always desirable. The government cannot simply lower interest rates without thinking about the problem of high inflation – remember Germany in 1930? (powerpoint class, week 4)

Lowering interest rates increased money supply in the economy more cash, but still possibly the same level (number) of of output.. Thus prices must go up!

MONETARY POLICY – THE PROBLEM OF INFLATION

We can see from the philips curve that as we lower the level of unemployment, there will be higher inflation…

Philips Curve

Monetary stimulusSo… interest rates spending and investment economic growth

unemployment… BUT ALSO……. INFLATION

MONETARY POLICY – THE PROBLEM OF INFLATION

The government may also lower inflation by raising interest rates, however spending, economic growth levels will fall; and unemployment levels will rise.

Philips Curve

Monetary contractionSo… interest rates spending and investment economic growth

unemployment… BUT ALSO……. INFLATION

MONETARY POLICY – THE TWO OPTIONS

FISCAL PLOICY

Fiscal policy is about government taxing and spending-

What they take as taxes and what they spend on schools, roads, hospitals, etc.

Governments consume by spending in the economy (this grows the economy)

Governments take money out of the economy by taxing (this slows the economy)

FISCAL POLICY• Fiscal policy – governments collect tax and

spend money (Government expenditure). By spending more than the taxation level the government can increase GDP, and visa versa. By using this tool over the business cycle the government can

A.Prevent recession (via fiscal expansion)

B.OR lower inflation rates during booming economic growth (via fiscal contraction).

FISCAL POLICY• When government spending is greater than

taxation there will be fiscal stimulus, however the government will have a budget deficit (they will accumulate a debt, this means they must borrow). This will stimulate economic growth.

• When the government spends less than they tax there will be fiscal contraction in the economy, this will result in the government saving more money and achieving a budget surplus (Saving more money than they spend). However, this will contract the economy (lower the level of economic growth)

FISCAL POLICY – FISCAL STIMULUS• Fiscal stimulation will lead to an increase in

spending in the economy (via increased government spending, called government stimulus) and this creates more jobs (lowering the unemployment rate).

• When more people have jobs they spend more money so consumption increases and so there is an increase in economic growth. However, higher economic growth will contribute to higher inflation in the economy, ceteris paribus.

FISCAL POLICY – FISCAL CONTRACTION

• Fiscal contraction will lead to an decrease in spending in the economy and this reduces the level of economic growth by reducing consumption and investment. This increases unemployment, however it also helps to lower the inflation rate, ceteris paribus.

FISCAL POLICY – THE PROBLEMS WITH CONTRACTION OR STIMULUS.

• Fiscal contraction problems Slower economic growth and increased unemployment levels.

• Fiscal stimulus problems increased government debt and pressure in inflation (pressure on the inflation rate to rise).

WHY DOES INFLATION RISE WHEN THE ECONOMY IS STIMULATED?

The inflation effect here is due to an increase in spending in the economy but no equal increase in output… Thus, as we mentioned before, more money is being spend but more goods are not available therefore prices go up, like in Germany, 1930.

THIS INFLATION EFFECT IS TRUE FOR BOTH:

A.FISCAL STIMULUS

B.MONETARY STIMULUS

Government borrowing to put more money into the economy can prices if output does not also.

Imagine a shop has 10 goods to sell, If more people have more money to buy these goods the shop will the price… inflation.Money is worth less.

This is how fiscal stimulus can cause inflation.

REMEMBER THE EQUATION FOR GDP?

Total dollar value of all goods and services produced in the economy, indicates the wealth of a country.

That is:

GDP = C + S + G + (X-M)

Or

GDP = C + I + G + (X-M) … Where S = I

C = Consuption I = Investment G = Government spending (X-M) = Balance of trade

S = Savings

REMEMBER THE EQUATION GDP

That is:

GDP = C + S + G + (X-M)

Or

GDP = C + I + G + (X-M) … Where S = I

C = Consuption I = Investment G = Government spending (X-M) = Balance of trade

S = Savings

REMEMBER THE EQUATION GDP

But G is actually the difference between government spending (GS) and government taxes (GT)

That is:

G= GS – GT

REMEMBER THE EQUATION GDP

So if GS > GT stimulus because G is positive the level of GDP will rise. Rising GDP is called economic growth.

If GS>GT…

G>0 GDP

economic growth

REMEMBER THE EQUATION GDP

So if GT > GS economic contraction because G is negative growth in GDP will be lower. Lower GDP growth is called a “slowing down” of the economic activity.

If GS<GT…

G<0 GDP

economic growth

THE PROBLEM OF FISCAL EXPANSION AND GOVERNMENT DEBT

So if governments spend more than they tax they can grow the economy increase in GDP

GDP = C + I + (GS – GT) + (X-M)

But if GS > GT the government must BORROW that extra money this means an increase in government debt.

FISCAL POLICY - LIMITATIONS

So as you can see Fiscal policy cannot grow the economy forever without causing an increase in the governments debt (and as we said earlier pressure inflation to rise)

These two issues prevent governments form always using Fiscal Policy to grow the economy.

FISCAL and MONETARY POLICY – THE INFLATION PROBLEM: A SIMPLE WAY TO UNDERSTAND IT:

imagine an economy has 10 goods to sell, 10 customers with $10 each.

The price will be $10 per good.

What if customers now have $20 each?

The price will rise to $20 per good. INFLATION.

FISCAL AND MONETARY STIMULUS TEND TO PUT PRESSURE ON THE INFLATION RATE TO RISE.

BUT WHAT IF…

HIGH TAXES DISCOURAGE BUSINESS GROWTH?

SUPPLY SIDE POLICY

Governments must make sure that their taxes and regulation do not inhibit (stop) businesses from growing. Too much tax and regulations will discourage businesses from growing.

SUPPLY SIDE POLICY

So the government wants to raise tax… OK, so how much should they try to raise?

Do economist have any advise for governments about the best way to work out the best level of taxation?

….. YES.

NOW…

IF: TOO MUCH TAX PEOPLE STOP WORKING

IF: TOO LITTLE TAXATION GOVERNMENTS DON’T HAVE ENOUGH MONEY TO FUNCTION.

TOO MUCH TAX PEOPLE STOP WORKING

Imagine you are working in a shop and the government takes all of your wage. Would you continue to work?

NO

Or if the government takes non of your wage, would there be money for roads, hospitals and schools?

NO

SUPPLY SIDE POLICY

Supply side theory says that there is a level of taxation which maximizes total government revenues. Above and below this level of taxation and there is a lower level of total taxation

It can be shown on a graph as follows:Thanks to the economist Laffer for this curve…

Above the maximum tax rate – People decide to not work so much lower total tax

Below this point More money can be made if tax is raised.

Economics is a bit complex but we are almost finished!

AND NOW…

EXCHANGE RATE POLICY IN KAZAKHSTAN

EXCHANGE RATE POLICY IN KAZAKHSTAN

Kazakhstan has twice devalued its exchange rate (currency value) in the last 10 years.

This devaluation has some positive and negative effects on the economy.

KAZAKHSTAN’S CURRENCY DEVALUATION

• A lower currency value will reduce the cost of Kazakhstan’s exports for foreigners, and therefore they will buy more. This will increase Kazakhstan’s export sector and help to grow Kazakhstan’s economy.

• On the downside, however, (the negative side) this devaluation will increase the price of imports and this will flow through the economy and increase prices in general.

KAZAKHSTAN’S CURRENCY DEVALUATION

But how did the currency devaluation impact on

inflation in Kazakhstan?

KAZAKHSTAN’S CURRENCY DEVALUATION –

What do you think?

The currency was devalued in February 16, 2014.

KAZAKHSTAN’S CURRENCY DEVALUATION- THE UPSIDE (POSITIVE EFFECTS)

• However, on the upside, if imports are more expensive, local Kazak people will buy more locally made products and this will increase economic activity in Kazakhstan. There will be higher sales for local companies and lower levels of imports.

• This devaluation policy is designed to improve Kazakhstan’s trade position. This means: increase the level of exports and decrease the level of imports.

KAZAKHSTAN’S CURRENCY DEVALUATION- THE UPSIDE (POSITIVE EFFECTS)

The currency devaluation should expand export sectors and reduce the level of imports – resulting in an improvement in the Balance of

Payments

KAZAKHSTAN’S CURRENCY DEVALUATION- THE UPSIDE (POSITIVE EFFECTS)

SO DID IT WORK?

KAZAKHSTAN’S CURRENCY DEVALUATION- THE UPSIDE (POSITIVE EFFECTS)

According to the World Bank –

YES.

Kazakhstan had a balance of payments (BofP) deficit of 0.5% in 2013

But there is a expected to be a BofP

surplus of 1% of GDP in 2014.

See for yourself

http://data.worldbank.org/country/kazakhstan

Today we looked look at:

The role of the Kazakhstan’s government in improving the macro-economy.

The role of Monetary Policy

Fiscal Policy

Supply side policy (taxation)

Kazakhstan’s devaluation and its implications.

Kazakhstan’s government and its macroeconomic objectives.